Trump's Trade War Put the UK on the Back Foot. His Actual War May Break Us
The government appears ill-prepared for the impending stagflation storm, with its "keep calm and carry on" strategy unlikely to withstand a harsh blast of economic reality. Britain is confronting the most severe energy shock since the early 1970s, yet official plans remain vague and delayed, fostering public anxiety rather than confidence.
Unprepared for Economic Fallout
It is uncertain whether the UK is better equipped to handle the fallout from Donald Trump's war with Iran compared to the pandemic six years ago. Ministers are sending mixed messages: assuring the public of support while reassuring financial markets that assistance will be limited and targeted. This contradictory stance undermines trust and highlights a lack of cohesive strategy.
Contingency planning is notoriously challenging with an unpredictable leader like Trump, but Britain's heavy reliance on imported energy and food means this approach cannot hold indefinitely. The economy was already struggling before the war began over a month ago, with unemployment rising throughout 2025 and growth nearly stalling in the final quarter.
Global Supply Shock Intensifies
Now, a colossal supply shock is hitting as exports of oil, gas, and fertiliser from the Middle East have dried up. Last year's fears of a global recession from Trump's "liberation day" tariffs were merely a prelude to this actual war in a volatile region critical to the global economy.
In recent weeks, the impact has been severe, particularly in Asia, which depends heavily on Gulf energy exports. The Philippines has declared a state of emergency, Sri Lanka implemented a four-day workweek, and South Korea introduced budget measures to combat spiralling energy bills. The International Monetary Fund warns that higher prices and slower growth are inevitable worldwide.
Stagflation Looming for Britain
Shortages are driving prices upward, reducing disposable income for non-essentials like fuel and food. Businesses may cut jobs to offset costs, leading to demand slumps and potential recession. Britain, already projected as one of the worst-performing major economies in 2026, faces heightened risks, with graduates likely to struggle in a tough job market.
Trump's recent suggestion that the war could end within weeks without a deal seems desperate. Even an immediate cessation would leave significant collateral damage across the global economy, including the US. Facing a stagflation scenario that could hurt Republicans in midterm elections, Trump appears to be backing down.
Government Hopes and Realities
In the UK, the government hopes a swift war end will limit economic damage and avoid tough decisions. They anticipate a short-term inflation spike, after which the Bank of England might resume interest rate cuts. Chancellor Rachel Reeves plans to scrap fuel duty increases and aid poor households with energy bills. However, this optimistic scenario is unlikely to unfold smoothly.
The Treasury currently avoids bold action or rhetoric, fearing bond market backlash over government borrowing. Yet, this crisis marks the third economic upheaval in two decades, following the 2008 banking collapse and 2020 pandemic. Past experiences show that countries can act decisively without bond market reprisals during disasters, using tools like aggressive rate cuts, increased borrowing, and money printing.
Calls for Proactive Measures
The Bank of England, warning of a "substantial negative supply shock," should prepare markets for interest rate cuts, which are inevitable and urgently needed. Reeves could mitigate labour market damage by reversing job-destroying increases in employers' national insurance contributions in her first budget. Additional measures, such as subsidising public transport and reducing speed limits, would help conserve energy.
Building Economic Resilience
This war, like the pandemic and Russia's invasion of Ukraine, exposes the fragility of global supply chains and underscores the need for greater self-reliance. Expanding renewable energy sources to reduce dependence on global fossil fuel prices is crucial. However, more action is required: Britain imports about 40% of its food and last had a trade surplus in manufactured goods in 1982. In today's unstable world, every country needs a plan for economic self-sufficiency, a need particularly acute for the UK.
