Trump’s trade war put the UK on the back foot. His actual war may break us | Larry Elliott
BLa Ritaine is facing the most serious energy shock since the early 1970s, but fear not: the government has a plan. The details of said plan are still a little sketchy, but will be revealed over time. Don’t panic. Keep Calm and carry on.
It remains to be seen whether the UK is better prepared to deal with the fallout from Donald Trump’s war on Iran than it was six years ago to deal with the pandemic. To be honest, it wouldn’t be difficult. Yet it is hardly reassuring that ministers are sending the public the message “we have your back” while seeking to reassure financial markets that any help will be limited and targeted.
To be honest, contingency planning isn’t easy when dealing with someone as unpredictable as Trump. But given Britain’s heavy reliance on energy and food imports, this line will only hold for so long.
The economy was already in bad shape when the war broke out just over a month ago. Unemployment continued to rise throughout 2025 and growth virtually stopped in the last quarter of the year. The country is now hit by a colossal supply shock as oil, gas and fertilizer exports from the Middle East dry up.
This time last year, there were fears of a global recession after Trump announced tariff increases on goods imported into the United States for “Liberation Day.” Ultimately, the global trade war was just a dry run for the real war – a real war in a part of the world that is proving not only volatile, but crucial to getting the global economy going.
These days I only write fortnightly, but a lot has happened in the last couple of weeks – nothing good for the global economy. Asia is the continent most dependent on energy exported by the Gulf and it is there that the impact of the war has been most marked. The Philippines imposed a state of emergency; Sri Lanka introduced the four-day week; South Korea has announced budgetary measures to help households cope with their skyrocketing energy bills.
But as the International Monetary Fund warned this week, all roads lead to higher prices and slower growth everywhere. Shortages cause prices to skyrocket, and as basic commodities – fuel and food – become more expensive, people have less to spend on other things. Companies are looking to offset rising costs by cutting staff. Demand collapses and countries fall into recession. In Britain, already expected to be one of the worst-performing major economies in 2026, it wouldn’t take much. This year’s graduates will have a hard time finding employment.
Trump’s announcement that the war could end within two or three weeks, even without a deal between Washington and Tehran, had an air of desperation. Even if the war were to end immediately, considerable collateral damage would be caused to all parts of the global economy, including the United States. So, faced with a classic stagflation scenario that would hurt Republicans in this year’s midterm elections, Trump blinked. At least, that’s what it looks like.
Here in the UK, the government hopes that a quick end to the war will limit the damage to the economy and avoid having to make difficult choices. There is a short-term rise in inflation, but once it becomes clear that there will be no permanent effects, the Bank of England may start cutting interest rates again. Rachel Reeves will scrap plans to increase fuel taxes this autumn and help poorer households pay their energy bills. Job completed. Chances are it’s not that simple.
Currently, Treasury will not act big – or even talk big – for fear that bond markets will run amok and demand a higher price to finance government borrowing. Yet this is the third economic crisis in the last two decades, and the experience of the 2008 banking collapse and the 2020 pandemic shows that countries can act without fear of a negative reaction from bond markets when faced with economic disaster. The policy tools used then – cutting interest rates aggressively, borrowing more, printing money – should be part of any serious emergency planning.
The Bank of England, which warns of a “significant negative supply shock” to the global economy, is expected to push markets to cut interest rates. Either way, it will happen eventually, and the sooner the better. Reeves could soften the blow to the labor market by reversing job-killing increases in employer Social Security taxes in his first budget. Additional cash to subsidize public transport, combined with reduced speed limits, would help save energy.
Britain must also redouble its efforts to strengthen its economic resilience. The war – much like the pandemic and Russia’s invasion of Ukraine – has exposed the fragility of global supply chains and the need for greater self-reliance.
The massive use of renewable energy sources is obviously part of this story. It makes sense to reduce the UK’s exposure to global fossil fuel prices. But there is still much to do. Britain imports around 40% of its food and its last trade surplus in manufactured goods was in 1982. In the world as it is, every country needs a plan for economic self-sufficiency. This need is particularly acute here.
