UK benefits more from deal with India than US

Britain’s trade deal with the United States is getting all the attention, but in the long run, British Prime Minister Keir Starmer’s deal with India is more important for Britain’s growth prospects. Meanwhile, the pound is creeping higher again.

After a period in which US President Donald Trump kept stoking the fires of trade, one deal after another has suddenly been reached in recent days. Earlier this week, the United States and China reached a ceasefire in their trade war. Just before the weekend, Trump announced an agreement with the United Kingdom. As part of this, the import tariff on British cars will be reduced from 27,5 to 10%. £9 billion worth of cars are shipped to the United States annually, making this the most important export segment. But as is often the case, the agreement is less rosy than it seems. For example, the agreement applies to only 100.000 cars per year.

Pay for each additional car
For each additional car, British exporters will have to pay the high import tariff. Moreover, the agreement will only come into effect after the green light from the American Congress. That approval may take longer than the ninety days for which Trump has put the tariff increases on hold. For the time being, therefore, no miracles should be expected from the trade agreement. Incidentally, a new trade deal with India could give the British economy a much bigger boost. The levy on no less than 90% of the goods shipped to India will be gradually reduced in the coming years. For example, the import tariff for cars will gradually decrease from 100% to 10%.

Growth forecast: slow down a notch
For Prime Minister Keir Starmer, who took office last year, the deal is a nice boost. The agreement is the largest trade agreement that the United Kingdom has concluded since Brexit in 2020. The country exports almost 40 billion worth of goods and services to India annually. According to Starmer, the agreement could contribute almost £2040 billion annually to economic growth around 5. That is welcome news at a time when no economic miracles can be expected from the British economy. Due to trade uncertainty and high interest rates, among other things, the International Monetary Fund lowered its growth forecast for the current year from 1,6% to 1,1% at the beginning of May.

Rising
However, the Bank of England (BoE) last week lowered the key interest rate by 0,25 percentage points to 4,25%. An interest rate cut usually has a negative effect on the currency market. This was hardly noticeable for the pound. The BoE board was quite divided. Some board members wanted to pause, while another group was in favour of an even bigger interest rate cut. This uncertainty indicates that a new interest rate cut at the meeting in June is by no means a foregone conclusion. It is therefore not surprising that the pound has now regained its upward trend after a step back in the first half of April.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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