It’ll take a miracle for the economy to grow under Rachel Reeves

As the IMF downgrades the UK’s growth forecast, Sean O’Grady says that a global trade war was always going to be bad news for ‘little Britain’

Well, Rachel Reeves, whatever happened to growth? The latest economic outlook from the International Monetary Fund (IMF) suggests it remains elusive, to say the least.

Not so very long ago, growth was presented almost as a panacea for Britain’s central economic problem – an economy with low investment and consequently disappointing productivity that stubbornly refused to expand in line with the needs and expectations of the nation. Stagnant wages, declining public services, derelict high streets… a pervasive sense of malaise summed up in the dread phrase “Britain is broken”.

Solve the growth conundrum, it seemed, and Labour could confidently look forward to the “decade of renewal” – and power – promised so often by Keir Starmer.

It feels less plausible now. Despite the “stability” given by a huge Labour majority, the changes to the planning laws, an ambitious housing programme, expanding virtually every airport and the tantalising prospects of free trade deals with America and India, the British economy does not feel like it has just been unleashed. Indeed, it feels as poorly as ever – an impression now confirmed by the IMF.

Although hedged around, necessarily, with lots of caveats and sadly infected by the massive uncertainties surrounding Donald Trump’s tariffs policy, the outlook for Britain and the entire world is indisputably gloomy.

The best we can look forward to in the coming years is fairly lacklustre growth, even in the major engines of progress in recent years, such as China and America; and there is even a small chance (about 5 per cent) of a prolonged global recession. It doesn’t take much imagination to see how that could feed through into social unrest and political instability – more grievances for the populists to feed off.

Britain is no exception, as the rise of Nigel Farage’s Reform UK indicates, even if they only offer joke solutions. As an unusually open economy, highly vulnerable to trends in world trade, financial flows and currently a medium-sized player in a world of hegemonic and increasingly quarrelsome economic blocs, a global trade war was always going to be bad news for little Britain, and the IMF is pretty unambiguous about that.

The good news, such as it is, is that this year UK economic growth will be 1 per cent – more or less as feeble as previously expected by the IMF, and in line with the other most relevant forecasters, such as the Office for Budget Responsibility (which is the “independent but official” figure) and the Bank of England (also independent, but not quite as official).

We are not in recession, though it may feel like it.

The looming problem for Reeves comes next year, when the IMF has a more painful downgrade for the country – down from a previous forecast of 1.9 per cent, which would be fairly good and in accordance with Reeves’s plans, to 1.4 per cent, which is decidedly mediocre.

Nor would there be a likely bounce back. Given that the depressing effects of the Trump tariffs will be a permanent fixture, so too will world and British economic growth be anaemic for the rest of this decade.

This means that Britain has, once again, less money to go round for everything – including the tax revenues to fund the public sector. Reeves gave herself a modest £10bn in “fiscal headroom” at the October Budget, which had run out by the spring statement, when the reforms to social security helped to restore it.

About a half of that – say £5bn – is now in jeopardy thanks to the chaos and confusion Trump has unleashed. This is felt not just in the real economy of supply chains and exports, but also in the financial markets’ reactions to the prospect of global inflation higher (because consumers pay tariffs no matter what Trump imagines), and weakening confidence, which also hits investment. The IMF calls it "unprecedented" uncertainty, and they're right.

For Reeves, all this means that at the autumn Budget this year she will, once again, have to face parliament, and ask her MPs to agree yet another package of cuts and tax hikes. We shall see, probably in June, what fresh horrors will befall our public services when the comprehensive spending review is published. Don’t forget that the planned increases in defence spending will only add to the pressures.

It is not too much to say that the future of the Labour government now depends on two rather different men. First, Donald J Trump. If he listens to the markets, relents and relaxes the threatened tariffs, then economic confidence and growth will still slow, but not as disastrously as they might if the current crisis of confidence turns into a Trump Slump.

If he goes even further for the UK and offers us the much-vaunted UK-US free trade deal that was supposedly the most luscious fruits of the Brexit tree, then he will almost single-handedly have put UK’s public finances back on track – as well as gifting a political coup to the solidly Remainer Starmer that was denied to Theresa May, Boris Johnson, Liz Truss and Rishi Sunak. No doubt Reeves will be doing all she can in Washington to hurry that along. It would be quite the bonus, even if it came at some cost.

Labour’s fortunes also rest with Andrew Bailey, the rather less vainglorious governor of the Bank of England, and his colleagues on the Monetary Policy Committee. Reeves needs him to maintain Bank rate cuts, both to keep the economy generally moving along and to keep the bill for the interest on the national debt under control.

Every government in the world is now relying on their central banks to support their economies through these more challenging times, even as inflation necessarily edges higher thanks to tariffs. It’s not Bailey’s job to help Reeves out of a hole, but he also knows how foolish it would be to tank the economy when at least some of the inflationary pressures will eventually wear off.

Given everything, it’s maybe a bit of a miracle that the British economy is set to grow at all in the short term. The headwinds are severe – an erratic White House throwing financial markets into constant crisis, a global trade war, China and America in open confrontation, a continuing energy crisis thanks to Putin’s war in Ukraine, and the vast mountain of public debt bequeathed by the global financial crisis, and the pandemic… plus the never-ending Brexit brake on trade and investment from Europe.

No British government can find an easy path to prosperity in such circumstances. The question is whether, or when, the public gets tired of chasing the pot of golden growth that, every six months to so, keeps disappearing over the rainbow each time Reeves gets up in the Commons to announce yet another reversal of fortune. The voters’ patience is wearing very thin.