Chancellor Rachel Reeves (Image: Getty)
Rachel Reeves has been warned not to blame Donald Trump’s global trade war for Britain’s economic woes after the International Monetary Fund said domestic policy was the main factor behind the UK’s sluggish growth. Meanwhile the United States is understood to be drawing up terms for trade talks with the United Kingdom, including demands for a cut to the UK’s 10% automotive tariff and looser rules on US agricultural imports such as beef.
The IMF cut its forecast for UK GDP growth next year from 2% to 1.5%, citing a string of homegrown pressures including the Chancellor’s ￡40bn tax increases and higher interest rates.
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Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “The tariffs are playing a role as they are in most countries, and it’s weighing down on growth in the UK. "But there are some UK specific factors, and I would say in terms of the downgrade for 2025, domestic factors are probably the biggest ones.” The warning came as the Chancellor travelled to Washington for talks with US officials, including Treasury Secretary Scott Bessent, amid growing concern about the global economic outlook.
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Mr Gourinchas said: “Weaker growth in the second half of last year is still weighing on the economy. It’s also the case that long-term interest rates are still elevated, and that has a drag on economic activity.”
The UK’s 2025 growth downgrade was the sharpest of any major economy, and the Fund now expects British inflation to average 3.1% this year — higher than any other G7 country and above the US at 3%.
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Despite recent fears that Mr Trump’s global tariffs could fuel inflation, Mr Gourinchas said: “The effect of tariffs on countries like the UK ... is lowering price pressures, not increasing them.”
The IMF also said price pressures would persist this year due to a series of factors including higher energy bills, council tax, water charges, the National Living Wage increase and the rise in employers’ national insurance contributions.
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Ms Reeves responded by insisting she was fighting for British interests overseas. She said: “The report also clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade.”
However, the IMF’s verdict will increase pressure on Ms Reeves. With the UK’s borrowing costs still high and the Chancellor’s headroom reduced to just ￡9.9bn, any further slowdown risks blowing a hole in her fiscal rules.
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The Fund also warned that if Mr Trump escalates his global trade war, it could shave $1 trillion off global GDP by 2027.
It said: “Ratcheting up a trade war, along with even more elevated trade policy uncertainty, could further reduce near- and long-term growth.”
A draft circulated by the Trump administration and seen by the Wall Street Journal also proposes revising rules of origin and reducing non-tariff barriers, though officials stressed the plans are not final. A White House spokesman said any deal would ultimately be decided by Mr Trump himself.