Donald Trump’s trade war and the country’s dire fiscal position risk plunging Britain into a Greek-style debt crisis, investors have warned.
Weaker economic output combined with the Treasury’s negative fiscal data are exposing Britain to a “negative growth spiral”.
Britain’s £2.7 trillion debt, which exceeds the size of the economy, leaves it vulnerable to the new trade regime as Trump’s tariffs raise the risk of a global recession. Britain’s current economic situation is reminiscent of the eurozone’s collapse, when bond markets turned aggressively against Greece as investors suddenly realised the country was on a fiscal cliff.
If nominal GDP growth stops – not just temporarily – below interest costs, then this country is in a real negative spiral, which can move very quickly.
The market turmoil…
The warning comes after Donald Trump’s so-called “Liberation Day” tariffs wiped $5 trillion (£3.8 trillion) off global stock markets and led to a downward revision in growth forecasts around the world.
Britain’s chancellor had backed measures to boost economic growth to offset Britain’s rising debt over the next five years, but an expected economic downturn from the US president’s trade war makes that plan irrelevant.
Trump has imposed a basic 10% tariff on all goods, with tariffs rising as high as 50%. Although Britain was spared a fixed 10% interest rate, its exposure to a global economy means growth forecasts are likely to soften and could trigger a crisis for British debt, known as gilts, which are bought and sold by global investors.
“Double whammy”
Bond markets could turn against the UK if investors lose confidence in Reeves’ economic plan.
Slower growth, higher inflation and a sharp swing in investor behaviour could all combine to push the UK’s borrowing costs higher at the worst possible time. This is not just the impact of a trade war, it is the kind of external shock that can cause already fragile debt markets to crash.
Tariffs could deliver a double whammy to the UK – stalling global growth while also driving up inflation. This is a nightmare scenario for any chancellor trying to stabilise debt. If markets lose confidence in the UK’s fiscal path, a massive sell-off in bonds is certain.
It follows a dramatic week for the global economy after the scale of Trump’s tariffs caught markets by surprise.
While UK bonds have so far been boosted by Trump’s tariffs, investors have warned that this could soon change. If Trump does not back down, this crisis will affect many different sectors of global markets.
Risk of further tax increases
The grim message comes shortly after the chancellor slashed welfare benefits to plug a £9.9bn budget deficit in the spring quarter. The Budget Office warned that in a worst-case scenario involving a full-blown trade war, she risks wiping out all the cushion she had left against her fiscal rules.
This means that after a record £40bn tax-raising budget in October, Reeves could be forced into more tax hikes in the autumn. Trump has vowed to stick with his aggressive tariffs despite the market bloodbath last week, insisting that “they’re doing very well” and that the economy is “healing”. The risks of a recession have clearly increased.
Businesses in the red
All this comes at a time when many British businesses are facing significant difficulties in the market due to high interest rates, a £26bn tax raid on employers that comes into effect on Sunday 6 April and weak growth.
Business confidence had already fallen by a third between mid- and late-2024, according to Trust Economics. The trade association for aerospace, defense, security and space warned that half of businesses planned to reduce investment this year.
