The week ahead: Trump’s first 100 days

It’s been almost 100 days since Trump was inaugurated – I know what you’re thinking, it feels more like 100 weeks – and the impact on global economies and financial markets has been profoundly negative.

Admittedly, there have been rollbacks of the initial very high tariffs on some countries and there are signs of further rollbacks to come, meaning financial markets have recovered much of their initial losses. But to a significant extent, the damage has been done.

We are starting to see the first signs of supply chain disruptions. The number of ships heading to ports on the west coast of the US has slumped and there is an uptick in ships heading to the UK and Europe – look out for more detail on that next week.

We also got the first batch of business and consumer confidence surveys for April. You wouldn’t need an economics degree to have predicted that they both fell sharply. This suggests the nascent consumer-spending-driven economic recovery in Q1 – with retail sales volumes surging to their highest level in three years and the expectation for GDP to have grown by 0.5% in Q1 – has already lost momentum.

Lower confidence means lower business investment and slower consumer spending growth. What’s more, there was a clear jump in firms’ input costs in April as increased employment costs following the Autumn Budget came into force. This increase in input costs is also clearly being translated into higher output prices. Lower confidence and rising costs create a recipe for ‘stagflation light’.

What can the US learn from the UK?

I don’t think anyone knows what the next 100 days have in store, or the next four years for that matter. However, there are similarities with recent events in UK history that we can draw on to get useful insight.

By dramatically increasing trade barriers, disrupting migration flows, creating a huge increase in uncertainty and attacking institutions, recent US policy looks very much like a combination of Brexit and the Liz Truss mini-budget.

For example, the Brexit vote in July 2016 caused a huge increase in economic uncertainty in the UK. According to OBR calculations, this resulted in a 10%+ drop in business investment. Indeed, the best estimates suggest that the UK’s economy is 3% smaller than it would have been without Brexit. It seems inevitable that there will be a similar chilling effect on business investment and economic growth in the US, which will also have a dampening effect on UK growth.

Financial markets in the US have also reacted to tariffs in a similar way to how financial markets in the UK reacted after the Liz Truss mini-budget. In times of uncertainty investors will normally leave risky assets, like equities, and flee to the relative safety of US government bonds. But this time investors have been selling US equities, government bonds and the dollar, suggesting that investors are fleeing US assets.

This was exactly the same dynamic we saw in September 2022 in the UK. Investors sold gilts, causing yields to soar (yields are inversely related to the price of a bond), which almost plunged the UK into another financial crisis. In that case, the Bank of England intervened and there was a swift rollback of government policy, and ultimately the resignation of Liz Truss.

To be clear, the US is not the UK. The dollar is the world’s reserve currency and that is unlikely to change anytime soon. That means investors are far more willing to hold onto dollar assets than they were UK ones. There is currently no risk of a financial crisis and the Fed has not even suggested it would need to step in. But, we have seen a surge in US yields prompting a partial rollback of tariff policy. It is not difficult to imagine a scenario where another flare-up in the trade war, combined with attacks on the independence of the Fed and other critical US institutions, prompts a more severe reaction in financial markets.

What does all this mean for the UK middle market?

The first is that borrowing decisions are going to get trickier.

One impact of tariffs is that inflation in the UK will probably be lower than otherwise. This means interest rates will come down more quickly this year and next so borrowing costs will be cheaper in the short term. But a trade war also means slower long-term global growth and higher inflation, so the cost of borrowing over the longer term has risen. In technical terms, the yield curve has steepened.

The second impact is that uncertainty seems to be here to stay. That’s an unhelpful backdrop, but UK businesses have more experience than most at operating in an uncertain environment and there is only so much that UK consumers will care about US tariffs on China.

Ultimately, growth will be slower this year than anyone expected. However, this will partially be offset by lower inflation and a faster fall in interest rates, meaning the economic recovery in the UK is delayed rather than cancelled.