A view from London

This, of course, precedes sweeping US tariffs and the ensuing surge in uncertainty that was seen in early April. Last week the OECD followed the IMF and downgraded its forecasts for global growth for this year and next, citing a significant increase in trade barriers and rising uncertainty. Unease is apparent in financial markets with the US dollar down 6% so far this year on a trade-weighted basis and the cost of 30-year borrowing for the US government reaching a 16-year high in late May. Global equity markets, however, have been cheered by a partial retreat on tariffs by the US administration and have more than regained the losses made on the back of Donald Trump’s initial tariff announcement.

We will learn more about the immediate effects of the tariff announcement when estimates for UK GDP in April are published this Thursday. Perhaps surprisingly, most UK activity data released since Mr Trump’s “liberation day” announcement have come in on the strong side of expectations with retail spending showing a particularly marked pick up in recent months. 

Our hunch is that, despite the headwinds, we will see continued, if unspectacular, growth in the UK through the rest of this year. A number of factors should help.

First, although the chancellor announced a large increase in taxes last October, she announced an even greater increase in spending – an average of £72bn a year for the next five years. The Office for Budget Responsibility forecasts that government consumption spending will rise by 3.7% over the course of this year, much faster than the economy as a whole or consumer spending.

Second, consumer incomes are showing good growth, with earnings likely to outpace inflation through this year.

Third, the UK’s framework trade agreement with the US, though not yet in force and hazy in part, should help ease trade uncertainty.

Fourth, interest rates are heading down. The Bank of England has cut interest rates twice since January and seems likely to do so at least once more this year. Lower rates boost the finances of businesses and households that have borrowed on floating rates. Many households rolling off two-year fixed mortgage deals are now seeing a fall in repayments though those with longer-term fixed deals face higher mortgage repayments. Still, UK consumers are being unusually thrifty at the moment possibly because they are preparing for higher mortgage payments or are overpaying their mortgage. On past form lower interest rates are likely to lead to a fall in today’s high savings rate, so providing a fillip to consumer spending power.

The UK isn’t out of the woods and the outlook is, at best, for lacklustre growth through the rest of this year. Still, that’s better than things looked a couple of months ago.