And so it begins. With US and European stock markets close to all-time highs, the self-styled ‘Tariff Man’ struck over the weekend, waking investors from their post-Christmas slumber. Stock markets sold off following the announcement of US tariffs on Canada, Mexico and China with many economists quick to print, forecasting recession, inflation and higher unemployment levels as a consequence. What comes next is uncertain, but future targets seem likely to include the EU and perhaps to a lesser degree the UK.
Within 48 hours tariffs on Mexico and Canada were suspended, with concessions made to stem the flow of illegal immigration and drugs across borders. This policy volatility just goes to show how difficult it could be for investors over the coming years. We might be well advised to block out short-term noise and instead focus on longer-term opportunities. All of this leaves Keir Starmer in a difficult position. With the pursuit of economic growth now at the forefront of policy, he must perform a political balancing act, described by a Downing Street official as ‘dancing between the three elephants’ of China, US and the EU. Will he ultimately be forced to choose between more alignment with Europe, or a trade deal with the US?
Whichever way the UK moves, there is a real risk that a tit-for-tat trade war affects global supply chains and prompts a rise in inflation. Longer-term this could prove tricky for the Bank of England, widely expected to cut interest rates when it meets tomorrow. If inflation remains stubbornly high, it could find its hands are tied later in the year when a number of commentators anticipate a faster degree of policy loosening might be required to boost persistently low levels of economic growth. As usual, predicting how all this ultimately plays out is likely to be very hard indeed.
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