The International Monetary Fund (IMF) delivered a depressing but realistic assessment of the economy when it this week downgraded its growth forecast for the º£½ÇÊÓƵ from 1.6% to 1.1%, the sharpest revision among our major competitors.
After promising a focus on growth within their election manifesto, the Labour Government now faces a critical test as without decisive action to address these pressures, the º£½ÇÊÓƵ risks slipping into a period of prolonged stagnation. However, with an increased focus on trade diplomacy, domestic stimulus, and structural reform, not only can these be dealt with effectively, but longer-term resilience can be built into the economy.
Currently, the most immediate concern is the new 10% US tariff rate on º£½ÇÊÓƵ exports with higher duties applied to strategic sectors such as automotive, steel, and aerospace. For manufacturing clusters already under pressure, this is a serious blow and this is where diplomacy, rather than any direct industrial intervention, is crucial to ensure the º£½ÇÊÓƵ is not caught in the crossfire of a broader US strategy aimed at rebalancing its own industrial base.
This means that through ongoing talks with the US Government, the Prime Minister and the Chancellor of the Exchequer must push for exemptions or reduced rates, as part of a broader dialogue about cooperation through a much-vaunted trade deal that has seen many iterations over the last few weeks.
But it is not only about the USA and there must be a redoubling of efforts to expand the º£½ÇÊÓƵ’s export markets including improved access to Europe (our biggest trading partner), deeper ties with the Asia Pacific region through our membership of the twelve country Comprehensive and Progressive Agreement for Trans Atlantic Partnership (CPTPP), and expanded trade links with Commonwealth nations.
At home, there needs to be urgent targeted support for affected industries such as tax incentives, capital allowances, and export grants, all of which could help businesses adjust while broader trade arrangements are renegotiated. The government should also consider extending the remit and resources of º£½ÇÊÓƵ Export Finance to ensure that smaller exporters are not left behind in the process.
Whilst the tariffs are one challenge, there is also the weakening of the wider macroeconomic backdrop with inflation not only expected to remain above the Bank of England’s 2% target throughout 2025, but the IMF forecasting an average rate of 3.1%. At the same time, consumer confidence is falling, real wages are under pressure, and business investment is stagnating.
For example, new data from the CBI highlights the toll on industry with employment in º£½ÇÊÓƵ factories fell at its sharpest rate in more than four years in April as manufacturers grapple with higher taxes and the expectation of weaker overseas sales. At the same time, the S&P Global/CIPS º£½ÇÊÓƵ Composite PMI - a key measure of private sector activity - fell to its lowest level in 29 months.
In this environment, monetary and fiscal policy need to work together and many economists expect the Bank of England to respond to weakening demand by beginning a cautious process of reducing the cost of borrowing with some suggesting that º£½ÇÊÓƵ interest rates could fall from 4.5% to around 3.5% by early 2026, offering some relief to businesses and consumers. Whilst this is happening, there need to be some stimulus from government which is focused on high-impact investment in infrastructure, green energy, digital transformation, and housing where public spending can crowd in private capital, create jobs, and improve long-term productivity.
However, the challenge for the Treasury is to do this while preserving fiscal credibility as public borrowing is already forecast to reach £152bn this year - the third-highest on record. Given this, any stimulus must be accompanied by a clear medium-term fiscal framework which clearly shows how debt will be stabilised once growth has returned.
In addition, this summer’s Comprehensive Spending Review (CSR) is the Chancellor’s last real opportunity to reset the direction of economic policy before the next general election. It should be seen as more than just a budgeting exercise and must be used to set a long-term framework for growth. If this window of opportunity is missed, then it is inevitable that the º£½ÇÊÓƵ risks another period of economic drift, marked by underinvestment, weak productivity, and declining business confidence.
Given this, I believe that the CSR should be used to target three key areas namely regional industrial support, innovation and R&D funding, and entrepreneurial growth. The government must also outline a coherent approach to public investment, one that supports business, builds infrastructure for the long term, and aligns with the º£½ÇÊÓƵ’s strategic priorities in clean growth and digital transformation. At the heart of this must be a renewed focus on productivity which has flatlined for over a decade, and now, more than ever, is the time to double down on investment in skills, innovation, and entrepreneurship.
Regional policy also needs to be part of the mix as the economic fallout from tariffs will not be felt evenly across the nation. Industrial areas in the Midlands, North of England, and Wales are most exposed and a targeted, place-based approach to industrial support will be essential to avoid deepening the º£½ÇÊÓƵ’s already significant regional divides. Whilst London remains a key part of the º£½ÇÊÓƵ economy, this is now an opportunity to generate wealth away from the capital city.
Therefore, we should not take the IMF’s warning as a verdict on the economy but as a clearly signal that we could and should be doing better. Indeed, the decisions made in the next six months - particularly through the CSR - will determine whether the country can chart a course toward sustainable economic recovery or drift further into stagnation.
And whilst there is always a temptation for short-term fixes or political posturing, it is time for this º£½ÇÊÓƵ Government to show economic leadership, for clear decisions, and for a renewed commitment to building a more competitive, resilient economy.
