The UK has performed better than feared, with 0.5% growth, defying the surveys that suggested that shattered consumer confidence hit household spending.
Inflation is cooling, strong wage growth is occurring, and the economy is outperforming expectations. It sounds like good news for the UK, but since Donald Trump announced ‘Liberation Day,’ there might be a chance that Britain has entered the crisis.
It might be slightly better news for households under pressure as inflation dropped to 2.6%, but they might not know that this might be the beginning of a rocky path.
Economists predict inflation will rise sharply, but how far it will depend on the trade war.
April is just half down, but it made it memorable for households, not in a good way. The rise in energy costs, council tax, broadband, and mobile phone charges was honestly dreadful for them.
Most experts at the Bank of England expect inflation to reach nearly 4% this summer.
When forecasts indicate that inflation will rise twice the target of the Bank of England, it gives enough reasons for policymakers to pause and reflect. This is why Andrew Bailer may postpone the cycle of interest rate reductions and consider a gradual and cautious approach.
The UK has performed better than feared, with 0.5% growth, defying the gloomy business surveys that suggested that shattered consumer confidence hit household spending.
The rollercoaster of US tariff policy has been in the headlines for the past few weeks. Before Trump’s trade war drama even started, the increase in inflation was supposed to be temporary.
The US president has been playing with the tax on imports. He initiated tariffs on goods imported into the US, then rowed back and delayed, but never stopped increasing tariffs on Chinese imports.
Some countries have tried to fight back with their tariffs, while others, like the UK, are trying to negotiate with them.
Economists believe the worsening global situation would increase the likelihood of a UK recession by the end of the year.
On the one hand, the US is shutting out Chinese imports, which could be (kind of) positive news since the goods initially produced for the American market might turn their route to the UK and other European countries, bringing the prices down. On the other hand, these tariffs disrupt the multinational companies’ supply chain, and tic-for-tac tariffs used by many countries could increase their prices.
What is clear as a bell is the damage that is going to happen to economic growth due to the trade war crippling import-export activity, business investments, and consumer confidence, which will inevitably create inflationary pressures. It is just a matter of time.
The UK economy has been sluggish lately, but with the trade war, the slight progress in the UK inflation rate might be short-lived. That is not the news the government wants to hear after they made economic growth their priority.
So, there is fire under the seats for policymakers at the Bank of England to boost growth by reducing the interest rates and lowering the cost of borrowing.
However, cutting the interest rates increases consumer demand, which risks raising prices and inflation beyond the 2% target.
The main concern for the UK is that growth hit due to the trade war will outweigh the risks from short-term inflationary rise.
Charlie Bean, a former Bank of England deputy governor, suggested a half-point interest rate cut due to growing pressure on the bank to bring the economy back to its feet.
Financial markets are almost certain of a quarter-point rate cut and expect another two by the end of the year.
The bank, which is trying to hold on to interest rates, will face challenges moving forward, given how uncertain the global economy is becoming.
While the UK is not shielded completely from global trade uncertainty and inflationary pressures, some hope does exist due to its recent good performance of robust wage growth and cooling inflation.
There is still some fear of a US-China trade war, but if policymakers strike the right cord of balancing growth without fueling inflation, the UK might be able to weather the global economic storm.
