• US trade tariffs add huge uncertainty to global economic outlook
• Mortgage market activity eases ahead of Stamp Duty changes in April
• Household savings pick up as stock of non-interest-bearing deposits surpass £300bn

US TRADE TARIFFS ADD TO BLEAK UK ECONOMIC OUTLOOK

1. In a widely expected move the MPC voted (by 8 votes to 1) to keep Bank Rate on hold at 4.50% in March in a ‘wait and see’ move following a 25-basis point reduction in February. Although there has been substantial progress on disinflation, CPI inflation remains above target and the Bank’s one-year Indicator of consumer price expectations continue to rise to 3.4% in February. This could reflect reactions to price increases in core household purchases such as food and energy and although this may not persist it could feed into future pay expectations. There are also several upside risks to inflation, in particular the US administration imposing import tariffs which could have a significant impact on UK inflation and growth.
    
2. At the time of writing, the Trump administration has imposed a range of import tariffs on over 100 countries ranging from 10% to 50% depending on the dubiously implied ‘tariff charged to the US based on the US’ trade deficit with each country. The UK will face the lowest tariff of 10%, but 25% on imported steel and aluminium. It is unclear if the US will stick to these rates or if there is room for negotiation with trading partners. It is also unclear to what extent trading partners will impose retaliatory tariffs on the US.
    
3. The US is the UK’s second largest trading partner and accounted for 15% of the UK’s goods exports and 10% of its goods imports in 2023. The latest OBR forecasts (published alongside the government’s spring statement on 26 March) suggests that in the most severe scenario US tariffs could reduce UK GDP by up to 1% and eliminate the UK government’s fiscal headroom. In this scenario there is a reciprocal 20 percentage point increase in tariffs between the US and the rest of the world. This is quite different to, and less severe than, the hybrid approach adopted by the US with a range of different tariffs applied to different countries. It is therefore not clear at this early stage how these tariffs, if unchanged, will affect the UK economy and the rest of the world.
    
4. The OBR also provide analysis on government’s residential planning reforms. They expect the reforms could boost housebuilding by 170,000 in total over the next five years resulting in an additional 1.3 million net additional homes by 2030. This is equivalent to just 0.5% of the housing stock in 2029/30 and still short of the governments published target of 1.5 million. Although forecasts are very uncertain at this point, the OBR expects greater housebuilding to be worth 0.6% of GDP by 2030 due to greater residential investment. This is expected to raise the level of potential output by 0.2% by 2029/30. Should there reforms stay in place beyond 2030, annual net additions could grow to 320,000 by 2034/5 and see potential output increase by 0.4%. Most of the additional building is not expected to take place until 2027/8 as it takes time for builders to plan and select locations. The additional supply of homes is expected to reduce the average house price by 0.8% in 2029.
    
5. Measures of labour market tightness have continued to ease slightly. The unemployment rate was estimated to be 4.4% between November and January, up from 4.3% in the preceding three-month period. However average earnings growth remained elevated at 5.9% in January, unchanged from December 2024. In real terms earnings grew by 3.2%. Job vacancies have been falling consistently since the peak of around 1.3 million in mid-2022 and now appear to have levelled out somewhat at 816,000 in December to February. This is broadly unchanged from the previous 3-month period but remain 2.5% higher than their pre pandemic peak. The vacancies to unemployment ratio remains around its equilibrium level, meaning this should not generate domestic wage inflation.
    
6. The ongoing uncertainty from global events has raised inflation expectations and longer-term market rates. Latest expectations (green line in chart) show Bank Rate falling to around 4.00% by the end of the year, and a low of 3.85% in three years’ time before increasing back to 4.00% in 5 years’ time.

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