6 March 2025: Bailey warns of “substantial risks” from Tariffs

It has been widely reported that Rachel Reeves has decided to cut welfare payments and public spending in her Spring Statement, which she will present to Parliament next month.

Reeves is gaining a reputation as Labour’s “Austerity Chancellor” as speculation grows about the level of cuts she will make.

Reeves has been left with little or no “wiggle room” by fears of a downturn in the global economy and the higher-than-predicted level of Government borrowing.

The Treasury was due to present plans for big-ticket items like tax and public spending to the Office for Budget Responsibility on Wednesday for its Spring forecast. A Government source said the "world has changed a lot" since the Budget in October, when the OBR indicated she had £9.9 billion of wiggle room within her self-imposed borrowing rules.

Last week the Prime Minister did not rule out spending cuts or tax hikes but did say that the big decisions on taxation had been taken in the Budget last Autumn. However, according to a Government source, the world has changed irrevocably since then.

People are seeing the world change literally before their eyes, and the OBR will reflect those changes in its forecasts later this month, and those changes will be reflected in Reeves’ response.

Her plans are still being formulated, but are believed to include cuts to welfare and further Ministerial efficiencies. DWP Minister, Liz Kendall, is believed to be drawing up plans to reduce the number of people who qualify for health-related benefits to get them back to work.

Bank of England Governor Andrew Bailey cautioned over the ‘major shift’ going on in the US after President Trump imposed trade tariffs on various countries.

Speaking to MPs yesterday, Andrew Bailey said there is a “major shift going on in the US” which the Bank would have to “take very seriously” when quizzed about the impact of new tariffs.

Trump and his administration have claimed higher tariffs on US imports will help it gain leverage over allies and rivals around the world.

But experts have warned that trade barriers could hurt both the US and other countries’ economies, including the UK.

Mr Bailey told the Treasury Select Committee: “The risks to the UK economy and the world economy are substantial,” while adding: “Trade supports growth.”

When asked if US trade policy could lead to people in the UK having less money in their pockets, he answered: “Yes, that’s right, We serve the people, and we have to take it very seriously.”

Economists have forecasted that the tariffs could trigger higher prices and more inflation in the US, leading to higher interest rates.

The pound's recent rally continued as the market sold the dollar, fearing that the U.S. economy would suffer from Trump’s imposition of tariffs. Sterling rose to a high of 1.2901 and closed at 1.2898.

One of the areas that has so far escaped the gaze of the President is Monetary Policy. No doubt, Trump and his acolytes find it incredible that such a major party of the economy is closed off to them. Even though Treasury Secretary Scott Bessent has confirmed Fed independence, there are rumours that Trump wants to “politicize” the Central Bank by adding a member of his team to the FOMC.

While that is unlikely to unbalance the Committee, the very thought of such action will send shockwaves through the financial community.

Democratic Representative Juan Vargas clashed with witnesses in a heated House hearing over Trump’s alleged efforts to politicize the Federal Reserve.

Vargas accused Trump’s allies of undermining the Fed’s independence. The fiery exchange exposed deep divisions over Trump’s economic agenda and its impact on the Fed’s autonomy.

President Trump's trade-war actions are expected to slow US growth in the near term. Policy uncertainties and potential trade war escalation add to the concerns. There's a focus on rebuilding US industries and small businesses, however, that will take years, possibly Trump’s whole term in office, to come to fruition.

Trump is not a patient man, and could easily enact further policies to speed up the process.

Washington politicians and Wall Street financiers are unsure of Trump’s motive. He could be simply sabre-rattling to bring America’s trading partners into line and the so-called “taking advantage” of the U.S. Or he could be genuine in his desire for U.S. manufacturing capability to be brought home.

Were it to be the latter, the Federal Government would face billions of dollars in subsidies to make manufacturing locally even come close to being viable.

Economic data released earlier this week saw manufacturing output remain above the crucial 50 level, which denotes expansion or contraction. However, it fell marginally from 50.9 to 50.4, which led investors to feel that it may contract over the coming months.

The employment report is due for publication tomorrow, and though its ancillary components rarely provide any sign about the headline number, the data published so far has been on the weak side.

Today, weekly jobless claims figures will be published, and they have been trending higher over the past few weeks, with the four-week average reaching 224k.

The dollar is continuing to fall. The index reached a low of 104.26 yesterday and closed at 104.32 as its main support, that of a very robust economy, was questioned.

The latest prediction for tomorrow's headline number of new jobs created in February is 160k, which would be a marginal improvement on the January figure. Such a read may bring a little stability to the dollar, but the risk is certainly to the downside.

There are green shoots of recovery becoming visible for the Eurozone economy, even though it may take a radical overhaul of structural capabilities, particularly in the region’s largest economies, for growth to reach the level it was at pre-pandemic.

The private sector managed to register an output of 50.2, which even though it was unchanged from last month, gave investors hope that the worst could be, if not over, then ending.

The HCOB final composite output index remained unchanged at 50.2 in February. The score also matched the flash estimate of 50.2.

As the index stayed above the neutral 50.0 mark, the figure signalled growth in the private sector.

The services Purchasing Managers Index decreased to a three-month low of 50.6 from 51.3 in January, indicating a loss of growth momentum, which investors need to keep an eye on.

The survey showed that growth was led by Spain, where a strong and accelerated increase in business activity was registered.

Germany was a laggard, despite the largest euro area economy registering a second successive expansion. Lastly, France was a hefty drag as business activity contracted for a sixth straight month and at the steepest pace in over a year.

Germany's final composite output index logged 50.4 in February, slightly down from 50.5 in January. The reading was well below the flash estimate of 51.0. Service sector activity growth moderated, but a slower reduction in manufacturing output counterbalanced this.

The services PMI dropped to 51.1 from 52.5 in January. The flash reading was 52.2.

The French private sector sank deeper into contraction in February, as signalled by the HCOB composite output index falling further below the 50.0 no-change mark. At 45.1, the index fell from 47.6 in January but held above the flash estimate of 44.5.

The services PMI fell to 45.3 in February from 48.2 in January and below the flash estimate of 44.5.

Italy's private sector moved out of the contraction zone for the first time in four months in February. The composite output index registered 51.9, up from 49.7 in January. The services PMI rose notably to 53.0 from 50.4 a month ago.

Spain's private sector growth strengthened in February, with the growth firmly centred on the services economy, as manufacturing production was little changed since January.

The entire report was a “mix bag” which was an improvement over a few months ago when it was all “red numbers”.

However, until France and Germany produce significantly improved numbers, the region will still be seen as bumping along the bottom.

A rate cut at today’s ECB meeting may improve confidence, but until rates reach a neutral or even an expansive level monetary policy will be a secondary consideration.

The euro rallied to a high of 1.0796 and closed at 1.0792. Given the turmoil Trump is creating in the U.S., it now seems more likely to reach the 1.10 level than parity.

Have a great day!