23 April 2025: Hopes for a growth upturn are fading fast

Since taking over as Chancellor of the Exchequer last July, Rachel Reeves has been determined to show how differently she plans to manage the economy. She wants to show that the reputation of Labour as a profligate Party, which borrows beyond the country’s means to fund excessive public spending, is in the past.

While her sentiments are laudable, in practice, she has driven the country to the verge of a recession while making unpopular decisions that have damaged her credibility with small businesses, pensioners, and farmers.

On her first trip to Washington as Chancellor, she received news yesterday which she both feared and dreaded.

The International Monetary Fund (IMF) has said the UK’s economy is set to be among the hardest hit in the global trade war.

In its latest global outlook, the IMF cut its economic growth forecasts for 2025, blaming Trump’s ‘Liberation Day’ tariffs for a “significant slowdown.”

In a sobering set of revised projections, the organisation said there were “extremely high levels of policy uncertainty” affecting the global economy, which it warned will slow even if countries negotiate tariff reductions with the US.

When it came to the UK, the IMF cut its growth forecast to 1.1%, down from 1.6%. The IMF also warned that the UK will experience one of the biggest increases in inflation because of the rise in utility bills this month. The IMF also highlighted problems in the UK’s domestic economy, mainly “weaker private consumption amid higher inflation as a result of regulated prices and energy costs”.

All of this means the IMF has predicted inflation of 3.1% for the UK, up by 0.7%, and way above the 2% target set by the Bank of England.

This collapse in growth expectations has happened almost entirely because of Trump’s tariff policy. At the start of the year, the outlook was relatively benign, but now all bets are off. In its World Economic Outlook published ahead of this week’s meeting, the IMF said a “major negative shock” had been inflicted.

“We expect that the sharp increase in both tariffs and uncertainty will lead to a significant slowdown in global growth in the near term.”

Reeves said she would be making the case for “free and fair trade” when she meets her US counterpart, Scott Bessent, for the first time and is also expected to press for the UK to be exempted from any tariffs. For the moment, however, there is little sign of the administration relenting.

Trump is unlikely to allow “special treatment of the UK despite his “nod of the head” towards it as he imposed some of the lowest tariffs on UK exports to the U.S. These may be should be acknowledged as sufficient.

The pound fell from its multi-year highs yesterday as the market acknowledged the spectre of stagflation, which is hanging over the UK economy. It fell to a low of 1.3245 and closed at 1.3294, but has seen a significant fall on the Asian opening this morning.

Jerome Powell sees no reason to relent to the pressure being exerted by President Trump to cut interest rates to ease the pressure on the economy that has been caused by the new administration’s imposition of sweeping tariffs on its import of goods and raw materials from most of the vast majority of the country’s trading partners.

The Fed Chair is facing increasing political pressure from Donald Trump, who is demanding an immediate interest rate cut. But Powell has no intention of yielding. Loyal to the independence of the institution he leads, he prefers to rely on economic data rather than political demands.

For several weeks, Donald Trump has publicly criticised Jerome Powell, even going so far as to call him a “loser” and threatening to fire him. The current White House occupant is betting on a rate cut to stimulate growth and strengthen his economic agenda. But the Fed, led by Jerome Powell, believes it is not yet the right time.

Powell is a lifetime member of the Republican Party, but doubtless sees the style of Republican Government that has been in place since January as not being “what he signed up for”. Powell and his colleagues on the FOMC are standing firm as Trump’s rhetoric pays no attention to the inflationary outcome predicted by the imposition of tariffs, even as they are placed on hold for ninety days.

The tariffs placed on China that remain in place will have sufficiently inflationary effects on the economy to make the current moratorium pointless.

Inflation remains above the 2% target, reaching 2.5% in February according to the PCE indicator. Moreover, the job market remains strong, with low unemployment and sustained consumption. All these factors lead Fed officials to hold back.

It is unlikely that inflation will change materially during the current quarter. Recent speeches by FOMC members have favoured a more circumspect approach, given the current state of the jobs market.

The latest employment report is due for release in a little more than a week, with little to indicate that there will be a significant fall in job creation.

Trump said that the March NFP figure showed that his policies were working, but he avoided two significant factors: First his policies had not come into force at the end of March, and Second, any increase in employment due to great “local” manufacturing is unlikely to be seen before mid 2026 at the earliest.

Minneapolis Fed President Neel Kashkari warned that US tariffs act as a drag on economic growth and emphasised the Central Bank’s responsibility to prevent those trade measures from fuelling longer-term inflation. Meanwhile, the Federal Reserve's current "moderately restrictive" monetary policy is right for an environment with an abnormal amount of uncertainty and fast changes taking place in U.S. government policy, Richmond Fed President Tom Barkin said last week. The dollar index began to make ground late in the U.S. trading day and reached a high of 99.69 on the opening in Asia and has remained close to that level.

The European Commission is dragging its feet in typical fashion over its reaction to the imposition of tariffs on its exports to the United States.

Rising uncertainty and higher tariffs will weigh on growth in the eurozone this year, the IMF said on Tuesday as it cut its forecast for the bloc’s growth, but the impact will be less than in other regions of the world.

The International Monetary Fund now sees the 20-nation eurozone growing by 0.8 percent this year, down from its 1.0 percent forecast made in January.

“Rising uncertainty and tariffs are key drivers of the subdued growth in 2025” for the eurozone, the IMF wrote in its latest World Economic Outlook report.

Even as US President Donald Trump has recently expressed confidence in reaching a trade deal with the European Union, his administration has already imposed 25 percent tariffs on aluminium, steel and cars produced in the bloc, and 10 percent on its other products.

Growth in the region had been expected to be anaemic at best over the next three quarters, and the IMF report merely confirmed what investors already believed. The increase in optimism that followed the announcement of the establishment of a five-hundred-billion-euro fund by Germany to invest in defence and infrastructure projects has dissipated at an alarming pace.

Germany had been expected to exit two years of recession with tepid growth of 0.3 percent, but the IMF now sees the eurozone’s largest economy stagnating this year.

France’s economy is now seen as managing 0.6 percent growth this year, down 0.2% from the IMF’s previous forecast, while Italy’s forecast lowered by almost half to 0.4%.

However, Spain remains Europe's shining light, thanks in part to the spending needed to rebuild following severe flooding. The IMF now sees the Spanish economy expanding by 2.5 percent this year.

European Central Bank (ECB) President Christine Lagarde said Tuesday that she hoped the U.S. President Donald Trump would not move to dismiss Federal Reserve Chair Jerome Powell, warning against political interference in central banking.

“I certainly hope not, I hope that it is not a risk,” Lagarde told CNBC when asked if Powell’s job security was a material risk to markets.

She declined to comment on market implications, stating only that she hoped the possibility was “not on the table.”

Eurozone inflation could be a touch higher this year than earlier thought but will then stabilise at the European Central Bank’s 2 per cent target, the bank’s Survey of Professional Forecasts showed on Tuesday.

The ECB cut interest rates for the seventh time in a year on Thursday, arguing that disinflation was well on track and risks were on the rise that price growth would come even lower than earlier thought.

The ECB’s survey, often a key input into policy deliberations, showed 2025 inflation averaging 2.2 per cent, above the 2.1 per cent predicted three months ago, while the 2026 number was lifted to 2.0 per cent from 1.9 per cent.

However, these numbers may be less significant than in the past since the ECB’s cut-off for collecting projections was April 4, and financial markets have shifted significantly since then due to the US’s erratic trade policy.

The euro fell to a low of 1.1310 in early Asian trade as it consolidated its losses from earlier in the day. It recovered to 1.1410, but further selling pressure has seen it return close to its overnight lows.

Have a great day!