If the trade war between the US and China escalates, the consequences for the UK economy would be far starker than any Brexit outcome, according to Bank of England governor Mark Carney.
Speaking in Newcastle, Mr Carney (pictured) said any restriction on global trade caused by higher tariffs was negative for global growth, although the relatively small part of UK economic activity that comes from exports means the British economy would be relatively unscathed.
But he said if tariffs were to be imposed globally, rather than just between China and the US, then the UK would face “substantial” consequences.
Mr Carney said the impact of tariffs would be to make the cost of imported goods into the UK rise, stoking inflation, but also to damage consumer and business confidence, hurting economic growth.
The Bank of England governor said this creates a problem for policy makers. The traditional response to higher inflation is to put interest rates up, but if inflation is rising because of tariffs, then economic growth will be declining, so the central bank won’t want to put interest rates up, meaning inflation remains high.
He said while that scenario has already occurred as a result of Brexit, with inflation rising and growth falling, the UK economy has so far gained from interest rates being low around the world, boosting demand for UK exports.
But if tariffs are imposed globally, interest rates will rise as some countries respond to the trade war by trying to tackle inflation, and there will be less demand for exports, creating a worse scenario for the UK economy than is currently the case, he said.
Mr Carney’s comments come as the US announced on 11 July a plan to impose tariffs on £150bn of Chinese goods, in addition to the existing tariffs on £25bn worth of goods.
Luca Paolini, chief strategist at Pictet Asset Management, said a trade war would tip the world into the economic conditions known as stagflation, where inflation is persistently high, and growth persistently low.
From an investment point of view, Simon Edelsten, who runs the £92m Artemis Global Select fund, which has returned 80 per cent over the past five years to 10 July compared with 62 per cent for the average fund in the IA Global sector in the same time period, said it is relatively easy for investors to know which parts of the stock market will suffer as a result of tariffs and therefore it is easy to find stocks that will not be affected.
He said companies in the medical technology and tourism areas of the market will be relatively unscathed, but he sold companies such as Proctor and Gamble and Unilever, which are dependant on global trade.
He has very little invested in UK shares as he feels few of the companies listed on the FTSE are capable of growing regardless of the health of the wider economy.