Rachel Reeves’s mission to grow the UK economy has taken yet another knock, as the country’s economic forecast has been slashed as a result of a mounting trade war sparked by Donald Trump’s global tariffs.
Experts warned of rising inflation and a hit to world growth, dashing Labour’s hopes of reviving Britain’s spluttering economy, central to the party’s mission for government.
The Organisation for Economic Cooperation and Development (OECD) cut its predictions for UK growth to 1.4 per cent in 2025 and 1.2 per cent in 2026, down from 1.7 per cent and 1.3 per cent respectively from its previous predictions.
For the world economy, the OECD said growth would slow from 3.2 per cent in 2024 to 3.1 per cent in 2025 and 3 per cent in 2026, down from 3.3 per cent previously forecast for both years, largely as a result of trade tensions sparked by the new US president.
Earlier this month, Mr Trump’s new policies came into effect, seeing imports from Canada and Mexico taxed at 25 per cent, with Canadian energy products receiving 10 per cent tariffs.
While the UK has so far avoided harsh penalties, it has been caught by last week’s sweeping 25 per cent tariffs on steel and aluminium entering America.
In addition, the 10 per cent tariff that Mr Trump placed on Chinese imports in February doubled to 20 per cent.
Countries have been quick to retaliate and financial markets were sent reeling last week over fears the measures could spark a recession in the US.
Ms Reeves said the report shows the “world is changing, and increased global headwinds such as trade uncertainty are being felt across the board”.
She added: “A changing world means Britain must change too, and we are delivering a new era of stability, security and renewal, to protect working people and keep our country safe.”
The chancellor said this would mean Britain can “better respond to global uncertainty”.
But the Liberal Democrats said Labour’s economic policies are “acting as an anchor on any meaningful growth” and called for Ms Reeves to “change course”.
“At the spring statement, Rachel Reeves cannot bury her head in the sand. She must admit that her Budget has failed to break from the years of Conservative economic vandalism,” Lib Dem Treasury spokesman Daisy Cooper said.
She added: “The chancellor must change course by first scrapping her growth-crushing jobs tax which is about to hammer small businesses, and second, by embracing the idea of a bespoke UK-EU customs union which would unleash growth.”
It comes as Ms Reeves faces further difficult decisions at next week’s Budget, with the Resolution Foundation think tank warning that she may be forced to raise taxes to plug holes in Britain’s public finances.
She is expected to make a raft of public spending savings – including sweeping cuts to welfare – to make up for tightening fiscal headroom and balance the books.
Canada and Mexico have seen the biggest blows to their growth forecasts after Mr Trump’s move to impose harsh tariffs on imports from the US’s neighbours, who were the first to be penalised, alongside China.
But the US is also in line for economic woes from Mr Trump’s trade policies, with the OECD trimming its growth forecast for the world’s biggest economy to 2.2 per cent in 2025 and 1.6 per cent in 2026 – a marked downgrade from the 2.4 per cent and 2.1 per cent previously pencilled in.
In a stark warning, the OECD said in its interim economic outlook report that “consumers face much of the burden of higher tariffs” as it cautioned over a significant impact on living standards.
The report shows that inflation in the G20 group of countries will be sent rising to 3.8 per cent this year and 3.2 per cent next year, up from the 3.5 per cent and 2.9 per cent the OECD predicted in December, with interest rates likely to remain higher for longer as a result.
In the UK, it held its predictions for inflation at 2.7 per cent this year and 2.3 per cent in 2026.
The OECD said: “Further fragmentation of the global economy is a key concern.
“Higher and broader increases in trade barriers would hit growth around the world and add to inflation.
“Higher-than-expected inflation would prompt more restrictive monetary policy and could give rise to disruptive repricing in financial markets.”
For Canada, the OECD has predicted growth more than halving to 0.7 per cent this year and next, down from the 2 per cent it had predicted for both years.
Mexico will be sent into a recession, with output shrinking by 1.3 per cent in 2025 and 0.6 per cent in 2026, against forecasts in December for growth of 1.2 per cent and 1.6 per cent respectively.
Growth in China is projected to slow from 4.8 per cent this year to 4.4 per cent in 2026.
Europe will also be severely impacted by the trade war, with sharp downgrades across the board and the euro area as a whole now set to see growth of just 1 per cent in 2025, down from 1.3 per cent previously forecast, the OECD said.
“Governments need to find ways of addressing their concerns together within the global trading system to avoid a significant ratcheting up of retaliatory trade barriers between countries”, the OECD said.
“As already highlighted, a broad-based further increase in trade restrictions would have significant negative impacts on living standards.”
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