The market mood started out a little more positive this week, with US equities continuing to rally from their lows earlier this month on the back of hopes/expectations that the US will not adopt a blanket approach with the next round of tariffs
However, the mood has soured somewhat in the past two trading sessions, with President Trump announcing permanent 25% tariffs on auto parts and vehicle imports into the US – more on which later. There was plenty of speculation last weekend that the White House planned to water down some tariffs, with Trump saying late on Friday that there would be “flexibility” in his plans to impose tariffs on imports. He added on Monday that he “may give lots of countries breaks” but clouded the waters the following day by saying “I don’t want to have too many exceptions”. We really will have to wait and see next week for the detail, and maybe some more certainty on the tariff roadmap ahead.
Given tariffs are being wielded politically as much as economically, the situation is likely to remain fluid. As such the size, scope and timing of tariffs, and the industry, sector or country targeted, may well continue to change. We have already learned this week about “permanent” tariffs on auto imports to be imposed from 2 April. Trump described this as “the beginning of Liberation Day in America. If you build your car in the United States there will be no tariff.” When asked if there was anything that could be done to remove the tariffs, Trump added “this is permanent, 100%”. The White House confirmed the tariff will apply to both car parts and completed vehicles, but cars that meet the USMCA (United States, Mexico and Canada Agreement) trade terms would only face a tariff on their foreign parts. Around 50% of vehicles sold in the US are imported and cars assembled in the US contain around 60% foreign parts. Mexico leads in terms of the annual value of auto imports into the US, totalling around $50 billion, followed by the EU on $45 billion and Japan on $40 billion. A reminder that the tariffs also go way beyond trade deficits came earlier this week as Trump said the US intends to impose a 25% tariff on all imports from any country that buys oil from Venezuela starting next week, alleging that Venezuela has “purposefully and deceitfully” sent “undercover, tens of thousands of high level and other criminals”. Venezuela exported 660,000 barrels of oil a day last year with the top buyers being China, India, Spain and Italy – and the US, which imported around a third of the daily total. Chinese imports of Venezuelan oil make up just 0.2% of their total imports. Trump said the tariff would be on top of existing levies, which in theory would take the total tariff on China to more than 55%, not far off his election promise of 60%. There was considerable pushback from the US’s trading partners on the proposed auto tariffs. Canadian prime minister, Mark Carney, said Canada’s old relationship with the US was “over” and promised a “broad renegotiation” of the trade agreement between the countries. Japanese PM, Shigeru Ishiba, said “every option was under consideration”. Mexico, set to be hardest hit given the combined value of its auto and parts exports to the US is well over $100 billion, was more considered. Its president, Claudia Sheinbaum, said a complete response would come once the fuller range of tariffs is known next week. German economy minister Robert Habeck said the EU must “respond firmly”, adding “it must be clear that we will not give in to the US. We need to show strength and self-confidence”. Meanwhile, the UK chancellor, Rachel Reeves, said the UK had no plans to retaliate, adding that the government was “not in a position where we want to do anything to escalate these trade wars”. Trump pushed back on the comments, posting that if the EU worked with Canada “in order to do economic harm to the USA, large scale tariffs, far larger than currently planned, will be placed on them both”.
There’s been plenty going on closer to home, with UK chancellor Reeves announcing her Spring Statement, which was accompanied by the latest growth forecast from the Office for Budgetary Responsibility (OBR). The backdrop to the statement is one of significant challenges to the public finances, with lower growth and higher borrowing costs erasing the £10 billion fiscal headroom from last October’s budget to a deficit of £4.1 billion. It was no surprise to see the OBR cut growth forecast to 1% – half of their previous forecast. More positively, the forecasts for 2026 to 2029 were all slightly upgraded. The persistence of inflation was reflected in an increase in the 2025 forecast to 3.2%, up from 2.6% previously, with CPI expected to reach the Bank of England’s 2% target in 2027. The chancellor announced additional tax compliance measures along with welfare and spending cuts to raise approximately £10 billion by 2029-30, with defence spending to accelerate in the near term funded by cuts to overseas aid. The additional measures mean the OBR’s expectation for fiscal headroom remains at £9.9 billion in 2029-30. It noted that the long-term fiscal outlook “remains very challenging” and that the headroom could be wiped out by a full-blown trade war among other risks including pressures from an ageing population, climate change and rising geopolitical tensions putting the public finances on an increasingly unsustainable path. The OBR also noted the chancellor was maintaining only a “very small margin” with just a third of the average headroom set aside by previous chancellors against their fiscal rules since 2010. Such a small margin suggests speculation over tax increases will persist until the Autumn Budget with tough decisions to come on further spending cuts and tax increases.
The challenges for the chancellor are certainly not exclusive to the UK and extend across Europe – dealing with a growing strain on the public finances for health and welfare for an ageing population while also facing the likely need for significant increases in defence spending. However, other countries – most notably Germany, whose debt-to-GDP ratio is ”only” 62.7% – have significantly more fiscal space than the UK. The UK still also faces sceptical bond markets, a legacy of the budget under former prime minister Liz Truss, and the perception that the current government does not yet have a plan to get the economy anywhere near their 2.5% a year growth target. In the current fiscal year, the OBR expects the UK government to spend £105 billion on debt interest, compared to £88 billion for universal credit, £37.5 billion on defence and £90 billion on education. The chancellor has few options other than to try to cut spending as much as is politically palatable, while keeping further tax increases on the agenda for the autumn. The obvious but elusive fix is stronger economic growth. However, a package similar to that proposed in Germany looks impossible for the UK given the already perilous public finances and unforgiving bond markets. As for higher borrowing costs, the problem extends well beyond the UK. Government debt has surged across developed nations in recent years, thanks to the financial crisis, the pandemic and, in some countries, governments smoothing out energy price spikes in 2022. UK government debt is reflective of this, up 16% from 85.7% of GDP in 2019 to 101.8% of GDP in 2024 – the second largest increase of the 40 most advanced economies, according to IMF data. The OECD reported this week that interest payments are taking up the biggest proportion of wealthy nations’ economic output since at least 2007. Debt service costs as a percentage of GDP across 38 OECD countries climbed to 3.3% in 2024, up from 2.4% in 2021. This contrasts with defence spending at 2.4%. In the US, interest costs were 4.7% of GDP, 2.9% in the UK and 1% in Germany.
The backdrop and the outlook for the UK appears pretty bleak. Given the limited fiscal headroom and the substantial political and economic challenges, there are plenty of reasons to believe the chancellor’s limited fiscal headroom will be further eroded by ‘events’. In addition, the longerterm growth predictions remain based on extremely optimistic assumptions on productivity growth returning to levels unseen for 15 years. A more realistic assessment on the outlook for productivity would put a very large black hole in the public finances by the end of the forecast horizon in five years’ time. The chancellor has bought some time, but the lack of ambitious plans to boost economic growth aside from some planning reform suggests the UK will be mired in mediocre growth for the duration of this parliament. From the bottom up UK assets look attractive value, but from the top down there really is very little to get excited about. Our underweight allocation to the UK remains firmly in place.
Source: Columbia Threadneedle Investments as at 28 March 2025
