One of the greatest political comebacks in living memory will throw many aspects of life and politics in the USA into flux, but it may also mean a major disturbance to the fiscal strategy here in the UK set out only last week by the Chancellor. You can read our analysis of the effect of the Budget on UK businesses here.
Increased tariffs
Global exchange rates have already reacted to Donald Trump’s win, but policy makers and businesses around the world will now be absorbing the potential implications if the 47th President carries through with his threats to impose swingeing tariffs on imports into the USA. During his election campaign, he promised supporters extra levies of up to 60% on goods made in China and at least 10% on goods imported from everywhere else.
The nationalistic objective of this policy is to pull manufacturing back onshore, reviving home-based manufacturing industries and protecting jobs. Whether this comes to fruition or simply imports higher inflation while funding tax cuts is a matter for debate. What isn’t in doubt is what this will do to import-dominated economies like the UK.
The influential think tank, the National Institute of Economic and Social Research (NIESR), has analysed the potential effects, which make grim reading.
Inflation and consumer spending
NIESR predicts that the proposed extra tariffs will drive UK inflation up by around 3.4% in 2025 as UK imports become more expensive, thereby reducing the spending power of households and businesses.
Exchange rate
Sterling fell by 1.3% against the dollar immediately after the Trump victory was confirmed. If this re-rating of the dollar is sustained, it will add a further layer of increased costs to goods imported by UK businesses.
Conversely, it will make UK exports cheaper, except, of course, any going to one of our major markets in the USA where the gain will be neutralised by the higher tariffs.
Interest rates
Such a significant rise in inflation would force the Bank of England to consider raising interest rates, increasing funding costs for companies and suppressing private sector business investment.
Growth
NIESR estimates that economic growth in the UK would shrivel to 0.4% in 2025 (down from a forecast of 1.2%) and stall altogether in 2026.
Unemployment
Faced with the rise in the cost of imported goods and increased borrowing costs, companies may have no choice other than to reduce staffing levels and postpone hiring plans, even more so than the Budget’s hike in employers’ National Insurance contributions was already threatening.
What next for UK businesses?
If Trump follows through on tariffs and the NIESR predictions prove correct, the UK business community faces a very different future from what it was contemplating just a few days ago. They will be closely watching the signals coming out of Washington during the transition period up to the Inauguration next January, as past experience suggests that Trump will act quickly on a major promise such as higher tariffs.
Effectively, businesses have just ten weeks (including the hiatus of the festive season) to take whatever measures they can to protect themselves. All this, whilst also absorbing the huge extra cost burdens from last week’s Budget. This will be hugely frustrating for those hoping for a period of greater economic certainty under the new UK government. Whatever else, caution and heightened risk awareness must be the watchwords.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.