From the Desk of the Chief Economist March 2025

War: Ukraine and trade

One of the biggest concerns on everyone’s minds right now is the war in Ukraine. And economically, a global trade war remains a prominent worry – geopolitical tensions are the biggest global concern amongst IoD members, and concerns about the global economy have risen. Meanwhile in the UK, amidst another fluffy of government announcements, the OBR Spring Statement approaches, with every likelihood that the Chancellor will need to hold the fiscal event she promised not to have.

Global uncertainty builds

Starting with tariffs, there has been much chopping and changing by the US administration and this, as well as the levies themselves, has started to impact markets. The S&P 500 fell by 8% between 19th February and 10th March as fears over the US economic growth outlook built. Earlier in the year, it was felt that the US’s “America first” approach to economic policy would lift the US economy. But now, without the support from the promised de-regulation and tax cuts to counteract contractionary policy from trade tariffs, immigration crack-downs and public sector employment and service cuts, the growth outlook has shifted markedly. Interestingly, Trump has chosen to downplay the stock market response as being distinct and different from the business response – time will tell…

This uncertainty will tend to slow decision-making and spending globally: in the economic parlance, the option value of waiting increases. When uncertainty persists, investment spend weakens as hurdle rates for investment rise, along with the cost of finance as risk premia increase, and hiring decisions will be put on hold. Households will tend to increase their level of precautionary savings to ensure against the risk to their income and postpone major purchases. In the UK, growth forecasts for 2025 have already been coming down, and as global headwinds have built further – the latest average of new independent forecasts for 2025 is at 1.0%. A 0.1% decline in GDP in January will not be the starting point that the Chancellor was hoping for.

UK Prime minister talks tough, but is it enough?

The Prime Minister has so far navigated choppy global political waters deftly, helping to calm a flare-up between Trump and Zelensky, and vowing to lift UK defence spending to 2.5% of GDP from its current level by April 2027 – 3 years earlier than previously planned, to be funded by cuts to the overseas aid budget, with the “ambition” to lift defence spend to 3% of GDP. A new defence innovation body has been created and you can expect defence to feature prominently in the forthcoming industrial strategy – now pushed back to June.

Welfare cuts of approx. £5 billion are being pushed and although this is generating a backlash within the government, it is worth remembering that the UK spent £91 billion on non-pension benefits in 2022-23 and it is projected to rise to £147 billion by 2028-29, against which £5 billion (target date for delivery unspecified) does not seem huge.

There’ve additionally been a flurry of growth-supporting policy announcements, including the Planning and Infrastructure Bill, with the promise that those households next to new electricity pylons will receive £250 off their annual energy bills, some HMRC tax admin announcements (e.g. raising the income tax assessment reporting threshold for trading income from £1,000 to £3,000) and the scrapping of some quangos, including NHS England. The Prime Minister intends to target a 25% reduction in the regulatory burden on business, and we’re pleased with that intent – particularly as we called for a similar target in our recent Spending Review submission. But we note that the assessment of the economic impact of the employment rights bill by DBT was judged “not fit for purpose” and red-rated by the Regulatory Policy Committee (RPC), and that hasn’t yet had much impact on the government’s plans. So alongside a targeted reduction in regulatory burdens on business, including employment regulations, we would like to see better quality impact analysis done by the government of its regulations and also a mandated process for the government to respond to feedback from the RPC. We’ve also called for a twin target covering the burden of tax administration.

The Chancellor’s Spring Statement

At the time of writing, uncertainty remains high over the content of the Spring Statement. The OBR seem likely to judge that the Chancellor’s no longer meeting her fiscal rule that the current budget must be in surplus in 2029-30 due to a mix of higher borrowing costs and lower than expected tax receipts. Estimates suggest that the rule will now be missed by around £5 billion vs being met with a margin of £10 billion at the October Budget. But that assumes that most of the growth weakness is made up in future years. Remember that the Bank of England recently judged that recent growth weakness had been matched by a deterioration in the supply side of the economy, such that there was no such future catch-up. So a lot hangs on the extent to which the OBR’s trend growth assumptions change. At this point, the expectation is that this relatively modest rule miss will be plugged through spending cuts.