Though covered by a thin veneer of nuanced “econospeak”, the message of the International Monetary Fund (IMF) could not be clearer: Donald Trump is bad for the world economy and will make America poorer, not wealthier – now, tomorrow and far into the future.
The assessment of the IMF’s economists – who are listened to intently by investors, even if not President Trump – is damning. The downgrade in the growth forecasts for the United States this year alone amounts to almost 1 per cent of GDP – a loss of some $200bn, of which about half is a direct result of the tariffs announced on and after the ironically named “Liberation Day” on 2 April. Mr Trump was at least wise to postpone his foolish initiative by one day.
The losses to output and the negative effects on the living standards of Americans will continue to accumulate well into the long term. Rather than “trillions” of dollars flowing into the US Treasury, the impact of tariffs will be negative virtually everywhere on the planet. Trade wars have no winners and countless losers. As Mr Trump said, no other president has ever done anything like this before – but it’s not in a good way.
At least some of the rest of the collapse in world growth prospects also derives from the chaos and confusion that Mr Trump has brought to economic policy-making. For a time, it looked as if trade between the US and China would virtually cease. That panicked markets, so, for a change, the usual roles were reversed.
The latest example of Mr Trump’s expensive forays into economic policy is his description of the chair of the US Federal Reserve, Jerome Powell, as “a loser”. The president has not only taken the unprecedented step of threatening to sack Mr Powell, but also of declaring his intention to be rid of the world’s leading central banker as soon as possible.
Mature economies do not do such things. It would be unlawful, which doesn’t seem to trouble Mr Trump, and it has deeply unsettled financial markets – and that should concern every American and every government in the world.
It is already the case that Mr Trump has wiped trillions off the value of equity and bond markets around the world. He seems to sense that he already needs to blame someone, apart from perfidious foreigners, for the continuing disaster – which is why he’s urged Mr Powell to cut interest rates.
In a typically unnuanced social media post, the president warned: “There can be a SLOWING of the economy unless Mr Too Late, a major loser, lowers interest rates, NOW.” Unfortunately for Mr Trump, even he hasn’t the power to bully or fool the world’s investors, and the effect of a series of his impetuous, ill-considered statements has been to crash equities, bonds and the dollar – a particularly alarming combination, given that investors normally flee to US Treasury bonds in times of stress.
This time, it’s America that’s becoming a more risky place to keep one’s money; gold, German government bonds and the Swiss franc have been the choice beneficiaries of this crisis of confidence in Mr Trump’s administration.
It’s poignant to recall Mr Trump’s social media post just before polling day: “If Kamala wins, you are 3 days away from the start of a 1929-style economic depression. If I win, you are 3 days away from the best jobs, the biggest paychecks, and the brightest economic future the world has ever seen.” The markets have, so far, had their worst April since 1932.
The “Trump Slump” may not be far off. While the IMF doesn’t expect a recession in America this year, it has raised the probability of two successive quarters of contraction from 25 per cent to 37 per cent – much too high for comfort. Inflation, including those groceries Mr Trump pays so much attention to, will also increase. So much for making America great again.
Not the least of America’s concerned allies is the United Kingdom. The chancellor, Rachel Reeves, is in Washington to hear for herself the IMF’s gloomy prognosis for the British economy. Inevitably, as Britain’s second-largest trading partner, a major holder of dollar-denominated assets and a leading investor in the US, when America catches a cold, the British tend to get pneumonia.
The downgrade for British growth next year is thus substantial – down to 1.4 per cent, with inflation peaking at the highest rate in the major G7 economies later this year. The hit to British GDP and tax revenues will only add to the pressures Ms Reeves faces as she attempts to put the public finances on a sustainable footing, and that is inevitably bad news for public services.
Much of this reversal in British fortunes is because of the choices the Trump administration has made in its economic policy – and, even worse, the uncertainty surrounding how long any of its policies will survive before another presidential whim throws everything in the air again.
All the more reason, then, that when Ms Reeves meets her American counterpart, Scott Bessent, she will need to press the case for that most elusive of Brexit benefits – the fabled US-UK free trade agreement. In reality, such is the present febrile geopolitical environment and the immensely complex nature of a full trade treaty (as well as the resistance of entrenched vested interests in Congress), that the deal will be less ambitious.
Nonetheless, a relaxation of the recent hikes in tariffs, a harmonisation of digital and biotech taxation and regulation, mutual recognition of professional qualifications and other measures could provide a welcome boost to the UK’s greatly denuded growth prospects. Britain will be required to make some hard choices and, as in all such trade deals, there will be winners and losers.
But the UK needs to rebuild its economy and return it to sustainable growth. In the long run, in principle, linking with what, even now, remains the world’s most dynamic economy carries enormous potential. If the Starmer administration manages to pull that off, conclude the long-awaited deal with India, and, crucially, achieves the overdue Brexit “reset”, then it might start to dream about Britain breaking out of its economic stagnation.
Grim as the IMF forecasts are, things can get better.
