The International Monetary Fund (IMF) has projected that President Trump’s trade policies will reduce the size of the UK economy by 0.3 percent by next year. The organization has expressed concerns that prevailing global uncertainties could jeopardize the UK government’s fiscal rules.

According to the IMF, the UK will feel the effects of “persistent uncertainty, a slowdown in activity among UK trading partners, and the ongoing influence of US tariffs” as Trump continues to advocate for extensive protectionist measures since April 2.

The IMF’s annual assessment highlighted that trade uncertainties, alongside market volatility that could inflate government borrowing costs and domestic spending pressures, pose “significant risks” to the government’s ability to implement its fiscal strategy effectively.

Failure to manage these risks could result in growing market pressures, increased debt levels, and challenges in adhering to fiscal rules, particularly given the limited fiscal space available, the IMF noted.

Luc Eyraud, the head of the IMF’s mission for the UK, advised that the Chancellor should “stay the course” in enforcing fiscal discipline, advocating for a singular review of the government’s fiscal space during the annual budget.

This approach could reduce the emphasis on limited fiscal flexibility and prevent the government from succumbing to market pressures for further spending cuts or tax hikes. The UK government reported a £9.9 billion margin against its primary fiscal rule during the spring statement, representing one of the smallest buffers in history.

“We are suggesting enhancements to the fiscal framework,” Eyraud stated. “A key aspect is to transition to a single annual fiscal event, a practice observed in other nations. Despite market pressures, we should resist the call for more frequent policy adjustments outside this fiscal framework.”

In its preliminary findings from the Article IV evaluation, the IMF raised its forecast for UK GDP growth to 1.2 percent for this year, an increase from the 1.1 percent projected last month, while maintaining a 1.4 percent estimate for 2026.

This increase stems primarily from a strong 0.7 percent GDP performance in Q1, and growth is expected to be further supported by anticipated interest rate reductions. The IMF forecasts the Bank of England will lower interest rates by 0.25 percent each quarter until the end of 2026.

The IMF’s estimate of a 0.3 percent decline in the economy assumes a US tariff baseline of 10 percent affecting significant trading partners. The recent UK-US tariff agreement, along with new deals with India and the EU, were acknowledged as positive, although they are not expected to have a substantial macroeconomic effect.

The outlook for growth is vulnerable to “persistent global trade uncertainties,” which threaten to weaken global economic performance, disrupt supply chain stability, and deter private investment.

The IMF commended the Labour Party’s proposals aimed at enhancing economic growth and productivity through reforms in planning and investments. These initiatives could potentially drive growth that offsets the adverse effects of proposed tax increases, provided they are implemented effectively.

Recent reports indicate that the Treasury is currently in a deadlock with some ministers regarding proposed public service cuts, including in policing and social housing. Additionally, HM Revenue and Customs (HMRC) is considering a reform of the salary sacrifice systems utilized by a significant portion of UK businesses as part of efforts to stabilize public finances, as reported by The Daily Telegraph.

Rachel Reeves, the Chancellor, remarked, “The UK was the fastest-growing economy in the G7 during the first quarter of this year, and the IMF has now upgraded our growth forecast.

“Our Plan for Change is yielding tangible benefits for working people — facilitated by three new trade agreements that safeguard jobs, encourage investment, and lower prices, as well as a pay increase for three million workers through the national living wage, leading to wages outpacing inflation by £1,000 over the past year.”