Closing post
Time to recap.
Global policymakers continue to count the cost of Donald Trump’s trade wars.
The governor of the Bank of England has told MPs that the global trade system has been ‘blown up’, and that fragmenting the world trading system is negative for world growth and world activity.
Andrew Bailey told MPs:
“The overall picture on trade now I’m afraid is one where the rules-based system is sort of dead. That has very serious consequences for the global economy.”
Bailey also warned that the future path of UK interest rate cuts was shrouded in a lot more uncertainty.
The OECD has warned that global economic growth is slowing more than expected, as the trade war weighs on the world economy.
It now expects global growth will slow from 3.3% last year to 2.9% in 2025 and 2026.
The OECD also downgraded its expectations for the UK economy this year and next from a forecast made in March, pushing down UK growth from 1.4% to 1.3% in 2025 and from 1.2% to 1% next year.
China’s factory output fell last month, as manufacturers were hit by falling orders and weaker export demand.
The US private equity group KKR has pulled out of a deal to inject fresh equity into Thames Water, leaving the troubled supplier’s future in doubt and increasing the prospects of a temporary nationalisation.
A review of the water industry in England and Wales has found that its “deep-rooted, systemic” problems are the fault of companies, the government and industry regulators.
UK ministers could give the go-ahead to the new Sizewell C nuclear power plant in Suffolk within weeks, according to reports.
Wall Street trading has begun with little drama, as tariff fears continue to weigh on the New York stock market.
The Dow Jones industrial average is up 13 points, or 0.033%, at 42,319 points. The broader S&P 500 index is 0.03% higher.
Traders are looking for signs of progress in trade talks between the US and its trading partners, and also digesting this morning’s growth forecast downgrade from the OECD.
Cyber hackers have claimed two more corporate victims.
Fashion brand The North Face and luxury jeweller Cartier have become the latest retailers to report having customer data stolen in cyber attacks.
The North Face has told some customers that it suffered “a small-scale credential stuffing attack” on 23 April, in which attackers used email addresses, usernames or passwords stolen from another company to long into its users’ accounts.
Cartier has told its customers that “an unauthorized party gained temporary access to our system and obtained limited client information.”
BoE's Bailey: Trump has ‘blown up’ global trade system
Back at parliament, Bank of England governor Andrew Bailey has told MPs that the rules-based, multilateral trade system that has underpinned the global economy has been ‘blown up’ by Donald Trump’s trade wars.
During his testimony to the Treasury committee this morning, Bailey explained how the overall picture of global trade has been significantly disrupted over the last few months.
This will have serious implications, he argues, unless policymakers can rebuild that rules-based system.
Bailey explained that over recent decades, a pattern of world trade agreements had been build up which led to a lowering of tariffs. It was initally based, after the second world war, on the GATT which became the World Trade Organisation.
Govenor Bailey warned:
I’m afraid that system has now, really been blown up to a considerable degree by all of this.
That has very serious consequences for the world economy, he continued, while also acknowledging that some of the Trump administration’s criticism of that system are well-founded.
As Bailey put it:
We can’t say the US administration is just wrong-headed. There are things that have gone on in this whole trade picture which, I think, do point to the stress that that system has been under.
But he adds, there will be “very serious implications for the world economy” if policymakers abandon that system and say it’s never coming back.
He cites the example of ‘most-favoured nation status’, which means that a country offer the same trade terms to all trading partners.
[The unilateral tariffs which Donald Trump announced would be imposed on US trading partners in early April were clearly at odds with the concept of MFN status, before he paused them for 90 days].
Bailey says:
That has now gone, it just isn’t part of the current picture. That has very serious implciations.
He argues that policymakers need to “come back to the multilateral table”, admit there were problems with the old system, and work very hard to fix those problems, adding:
If we abandon it, we’re into a much more difficult world.
Updated
Concerns over Thames Water’s future continue to mount, after potential rescuer KKR walked away from a deal to inject fresh equity (see early morning post).
Lena Swedlow, campaigns manager of cross-party campaign group Compass, say’s KKR’s about-turn is a victory for Thames’s customers, arguing that the company should be under public ownership:
“KKR pulling out of negotiations with Thames Water is a victory for the people of the region for whom it is an essential resource. It’s a victory for the work of the Thames Water Emergency Board in bringing together households, workers, local government reps, environmental groups, and experts who should be included in decisions about the future of water companies.
But it shouldn’t be a sigh of relief. A company with their record should never have been an option to take over a vital resource for millions of us.
“The Government proved that taking essential industries into direct control was possible with Scunthorpe Steelworks back in April. Thames Water are in crisis as a direct result of private investment - public ownership is the only option.”
Union UNISON’s head of environment Donna Rowe-Merriman says ministers must be decisive, saying:
“The situation at Thames Water can’t go on. Customers and staff are being failed at every turn and deserve better.
With the options running out, the government must take decisive action sooner rather than later.
The company’s been saddled with billions of pounds of debt by private equity firms after huge payouts to shareholders and bosses.
Thames Water staff need certainty about the firm’s future and billpayers need assurances about soaring prices.
The Cunliffe Review highlights once again that the water industry is broken. Failure to fund regulators properly, and give them the powers they need, has left the sector mired in financial turmoil and sewage spills.
Only sustained investment will ensure a clean and safe water supply, safeguard the environment and protect customers.”
Šefčovič to meet Greer tomorrow to discuss trade
The European Commission’s vice president Maroš Šefčovič is to meet US trade representative Jamieson Greer tomorrow morning in Paris as efforts to achieve a breakthrough on the threatened trade war intensify, my colleague in Brussels Lisa O’Carroll reports.
The world is currently holding its breath to find out whether Donald Trump will back down on his decision to double tariffs as of tomorrow on steel and aluminium products to the US to 50%.
But sources indicate it is unlikely that the EU will retaliate immediately given the delicacy of talks around the wider 20% reciprocal tariff plus tariffs on auto imports from the US.
The EU has the power to bring forward a €21bn package already agreed in April on the initial tariffs imposed by Trump on steel and aluminium.
However it has also agreed to try and find a swift path to settling their differences following Trump’s “good call” with European Commission president Ursula von der Leyen on 26 May.
At the time she emphasised the bloc’s readiness to act “swiftly and decisively”but said the EU would need until July 9 to finalise a deal.
It is understood they agreed to allow two weeks to play out from that call before taking any other steps, fuelling expectations that the EU would not retaliate against any new steel tariff tomorrow.
Turning to trade deals, BoE governor Andrew Bailey says that it’s “really good” to see the trade deal between the UK and India agreed in early May.
But, he warns, it will take time to see the economic benefits, as trade patterns adjust.
He reminds MPs that in the short-term, Brexit will have a negative effect on the UK economy by making it less open, but that damage can be reduced through trade deals.
Bailey adds that it would be a “good thing” if the UK can “rebuild trade with the EU, our largest trading partner” (echoing points he made last week).
Updated
Asked whether the dollar’s safe-haven status is under threat, BoE governor Andrew Bailey says non-US investors have been reassessing how much risk they want to take.
But, he suggests, many investors were probably ‘overweight’ on US risk in the past, due to an optimistic view of the US economy.
They’re reassessing that. And they will do that, and go on doing that I’m sure as this story unfolds.
But… Bailey says he doesn’t see the US dollar losing its reserve currency status. That status means US assets have a strong “embedded position” in the financial infrastructure, such as the way Treasuries (government debt) are used as a risk-free assets,
“it would take a lot to change that,” Bailey points out.
BoE governor questioned about Taco trade
Andrew Bailey then warns MPs that stock markets could suffer falls if trade war tensions flare up again.
He is asked about the recent recovery in share prices:
Q: Does the “dramatic recovery” in equity markets in recent weeks back up the hypotheses of the Taco trade – that the damage caused by president Trump is overstated because Trump always chickens out and is terrified of the bond markets?
Bailey says he won’t get into the question of the “taco thing’, telling MPs:
That’s a euphemism that people in markets have come up with. I don’t think the president particularly likes it.
Indeed….
Bailey agrees there has been a lot of volatility in the markets recently.
He is most concerned when you see rising bond yields, falling currencies and falling equity markets.
That became quite acute on two occasions after Liberation Day, and on both occasions the administration did respond – with a 90-day period to negotiate trade agreements with other countries, and with reassurance about the position of Fed chair Jerome Powell, Bailey says.
He cautions that policymakers need to watch this very carefully, as the equity markets are obviously discounting views of the future.
Bailey tells the Treasury committee:
They appear to be discounting a more optimistic view about how this will come out. We need to bear in mind, therefore, that their view is conditioned on that and if things change they will respond.
He adds that fortunately, we have not seen a real threat to financial stability from trade tensions.
BoE policymaker Swati Dhingra is hopeful that the UK will avoid a repeat of the recent inflation shock in the next few years, thanks to signs that trade war tensions is eased.
Dhingra tells the Treasury commitee that she is encouraged that prices will remain under control.
She is hopeful that the world will avoid fragmenting into multipolar trade blocks, as could have happened if Europe had retaliated against the US with similar tariffs, sparking a full-blown trade war.
Instead, given the way policy developments have panned out, Dhingra is ‘somewhat reassured’ that the impact of trade tensions will be milder than the worst case scenarios, and even some less severe scenarios.
However… BoE policymaker Catherine Mann warns that supply chain disruption can potentially lead to an environment of higher volatility in inflation, which can require higher interest rates to control prices.
Andrew Bailey: fragmenting world trade system is negative for growth
Andrew Bailey adds that there is “a lot more uncertainty and unpredictability” about the global trading system, and the global economy more widely.
Bailey tells MPs that the Bank must make two judgements:
1) what are the policies going to be.
2) what’s the impact of those policies.
The challenge with the first judgement is that the Bank needs to “stop the music” when it takes its decisions, Bailey says.
But the question of the impact is more important.
Bailey tells the Treasury committee:
The impact of fragmenting the world trade system is negative for world growth and world activity.
It obviously increases uncertainty, Bailey adds, saying he’s heard this message as he goes round the country meeting businesses.
That uncertainty causes delays to investment decisions. These are one-off decisions, and the appeal of waiting has gone up in the current climate, Bailey says.
He adds that the impact of trade tensions on prices is more ambiguous.
One argument is that it will lower world activity, which lowers world export prices which lowers inflation. That is ‘quite open to question’, though, the Bank of England governor argues.
But if supply chains are disrupted, it could have the opposite effect and create upward pressures on inflation.
"At the moment it’s frankly too soon to tell, Bailey concludes -- which backs up his earlier point about the uncertainty that is shrouding the path of UK interest rates.
BoE governor: path of interest rate cuts is shrouded in uncertainty
Bank of England governor Andrew Bailey has warned that the path of UK interest rates ‘is ‘shrouded’ in uncertainty, due to the turmoil created by trade conflict.
Testifying to the Treasury committee this morning, Bailey declines to predict how he might vote at the Bank’s next meeting, in late June.
Bailey believes that the path of UK interest rates, which were cut to 4.25% last month, is still lower. But, he warns, that process is harder to predict.
Bailey tells MPs:
“I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly.”
He says the “the external situation” is relevent, reminding the commitee that the Bank has adjusted the language it uses to describe the economic environment, saying:
We’ve added the word ‘unpredictable’ to ‘uncertain’ , because of the sheer nature of what we’re dealing with.
[Reminder, the OECD cut its forecast for global economic growth in 2025 and 2026 this morning, due to the turmoil caused by Donald Trump’s trade wars.]
Policymaker Catherine Mann agrees with Bailey that the glide path for UK interest rates is downwards.
But, Mann cautions that it’s not possible to predict by what steps that journey will happen, or over what timeframe.
Deputy governor Sarah Breeden also believes the path for interest rates is lower, but tells MPs “there is uncertainty about how far, how fast.”
Updated
BoE denies 'group think' charges
Bank of England governor Andrew Bailey has denied that there is a culture of “group think” on its Monetary Policy Committee.
He point out that chief economist Huw Pill voted to hold interest rates last month, while other Bank officials voted for a cut.
Deputy governor Sarah Breeden, who has voted with the majority at every meeting she’s attended so far, also pushes back against ‘group think’ accusations.
She says those majorities have often been a ‘broad church’, saying she has had a different interpretation of the economic outlook than colleagues (even if they voted the same way).
[the overall MPC did look rather disunited last month, with nine policymakers split 5-2-2 between a small rate cut, a large one, and no cut at all].
Updated
Here’s a live feed of the Bank of England’s appearance before the Treasury committee:
Dhingra: Do I need to start voting for larger rate cuts?
Treasury committee chair Dame Meg Hillier MP reminds Bank of England policymaker Swati Dhingra that she has now been outvoted at 16 of the 21 MPC meetings she’s attended.
Dhingra has been a persistently dovish member of the committee, and argues that interest rates could have peaked at a lower level (they hit 5.25% in August 2023, and were kept there until August 2024).
Last month, she voted for a half-point cut in rates, to 4%, while a majority voted for a smaller cut to 4.25% (and two policymakers, including Catherine Mann, wanted no change).
Dhingra tells MPs today that “keeping policy gradual is a good thing”. But the problem is that if interest rate policy has been held too tightly for too long, at some point that starts to “really play a role”.
Hinting that she could vote for larger rate cuts than in the past, Dhingra says:
“I now need to start thinking about ‘do I increase the decrements for which I’ve been voting, or not?’”
BoE governor confident pay growth will slow
Bank of England governor Andrew Bailey is confident that UK pay growth will slow this year.
Bailey takes issue with Catherine Mann’s argument (see last post) that the labour market hasn’t weakened this year, telling MPs that the UK labour market “has loosened somewhat” since February.
Governor Bailey points to recent data showing pay growth has slowed faster than expected, as he explains why he voted for a quarter-point cut to interest rates last month.
Although wages have been rising faster than is consistent with the Bank’s 2% inflation target, Bailey says the Bank believes pay growth will come down this year, based on what it is seeing in the data, and what firms around the country are telling the BoE.
He is sticking with his policy of taking a “gradual and careful” approach to interest rate cuts.
Deputy governor Sarah Breeden says he also favoured the quarter-point cut in Bank rate, “even absent” international developments (ie, trade wars).
She says the persistence of inflation will depend on pay growth, citing predictions from the Bank’s agents that pay rise settlements will slow to 3.7% by the end of this year, more than a percentage point lower than where we are today.
Updated
BoE's Mann defends rate vote flips
Bank of England policymaker Catherine Mann has pointed to recent easing in financial market conditions to explain why she has switched her position on interest rate cuts twice this year.
Mann, who had been traditionally seen as a hawkish member of the BoE’s monetary policy committee, is in the spotlight after flipping to a dovish position in February when she voted for a half-point cut in interest rates (when most colleagues favoured a quarter-point cut).
Then in May she flipped back, and was in the minority voting to leave rates on hold (when the MPC plumped for another quarter-point cut, in a three-way split).
Today, she tells MPs that the two votes have to be looked at in the context of economic and financial market conditions.
In February, Mann explains, she was looking at the prospects for the UK labour market to “loosen in a non-linear way”, as increases to the minimum wage and employers’ national insurance contributions hit the jobs market.
At that stage, she says, a 50bp cut was needed as financial conditions were not consistent with those risks.
But by May, things had changed. Partly because the labour market had not loosened as much as she had feared. Consumption was no weaker than expected, she tells the Treasury commmitee, and inflation was not decelerating in a way consistent with hitting 2% target, with goods prices rising not falling.
But most importantly, from February to May, financial markets had eased quite dramatically [thanks to Donald Trump’s trade war spooking investors]. That, Mann says, actually delivered more of an easing than the 50bp which she voted for in February, she insists.
Incidentally, FT Alphaville recently worked out that Catherine Mann now holds the silver and bronze medals for rapid vote shifts.
Bank of England MPC members to discuss interest rates with MPs
Over in parliament, the Treasury committee is holding a session with Bank of England policymakers.
They’re hearing from governor Andrew Bailey, the Deputy Governor for Financial Stability, Sarah Breeden, and external members Dr Catherine Mann and Dr Swati Dhingra.
They’ll discuss the Bank’s decision to reduce the Bank Rate by 0.25 percentage points to 4.25% in early May, as well as the increase in inflation in April and the impact of US tariff policy.
This week, as part of our ongoing scrutiny of the @bankofengland’s Monetary Policy Reports, we’ll hear from members of the Monetary Policy Committee
— Treasury Committee (@CommonsTreasury) June 2, 2025
Watch live from 10.15am on Tuesday 3 June 👇
Eurozone inflation falls to 1.9%
The cost of living squeeze across the eurozone has eased last month, potentially smoothing the way for cuts to interest rates.
The Eurozone inflation rate fell to 1.9% in May, down from 2.2% in April according to a flash estimate from statistics body Eurostat.
That takes euroozone inflation below the European Central Bank’s 2% target, for the first time since September 2024.
The decline was driven by cheaper energy prices – energy prices fell by 3.6% across the eurozone, having been flat in April.
Food, alcohol & tobacco is expected to have the highest annual inflation rate in May, at 3.3% (up from 3.0% in April), followed by services (3.2%, compared with 4.0% in April), non-energy industrial goods (0.6%, stable compared with April) and energy (-3.6%, stable compared with April).
Euro area #inflation expected to be 1.9% in May 2025, down compared to April 2025. Components: food, alcohol & tobacco +3.3%, services +3.2%, other goods +0.6%, energy -3.6% - flash estimate https://t.co/7ovXSgM7V9 pic.twitter.com/XtB3ErmvPF
— EU_Eurostat (@EU_Eurostat) June 3, 2025
Diego Iscaro, head of European Economics at S&P Global Market Intelligence, says:
“This easing inflation is good news for households, as it will help to offset some of the headwinds on consumption stemming from a highly uncertain economic environment.
“May’s inflation print, coupled with the moderation in wage growth during the first quarter, suggests that the ECB will almost certainly cut rates by 25bp later this week. We expect a disinflationary environment will drive further monetary policy easing during the second half of the year, with the deposit rate likely to reach a low of 1.5% during the third quarter.”
Updated
Stock markets dip after OECD growth downgrade and weak China factory data
European stock markets are in the red this morning, as investors digest the OECD’s downgrade growth forecasts (see here) and the weak manufacturing data from China (see here).
Germany’s DAX has dipped by 0.2%, while France’s CAC has lost 0.35%.
The UK’s FTSE 100 share index has lost 26 points, or 0.3%, to 8747 points. Mining companies are among the fallers, following a drop in commodity prices after China’s factory output fell at its fastest rate since September 2022.
The futures market indicates Wall Street will open lower too.
#Futures now. Like yesterday , we start on #red #Nasdaq #SPX #Dow #Russell2000 pic.twitter.com/bGjUktagvh
— Asdrubale™ 𐤏𐤆𐤓𐤁𐤏𐤋 (@Asdruba33479610) June 3, 2025
Russ Mould, investment director at AJ Bell, says investors are showing signs of nervousness around tariffs and the economic outlook.
“The OECD has downgraded its forecast for global economic growth as the effects of the trade war start to be felt. It’s only a small revision – from 3.1% to 2.9% for 2025 – but it’s still enough to cause investors some indigestion as they consume their morning news. The downgrade weighed on the mining sector as the market fears it could mean reduced demand for commodities, and therefore a potential knock to the price of metals and minerals.
“The 90-day pause on tariffs has just over a month before expiration, meaning the pressure is on countries to do deals with the Trump administration. Reports suggest that Trump wants best offers on trade negotiations by Wednesday, perhaps to avoid any last-minute rush or stalemate situations.”
Alistair Carmichael MP, who chairs the UK parliament’s EFRA Committee, fears that Thames Waater is now in a ‘perilous position,’ now that KKR has walked away.
Carmichael, whose committee has been examining the water industry, says:
“In our evidence session with Thames Water bosses in May we raised serious concerns that Thames had only pursued one bidder at an early stage for its takeover bid, against the wishes of Ofwat, and highlighted the risks this could pose if KKR chose not to proceed. Unfortunately, our concerns have been realised, putting Thames in a perilous position.
“The Government has shied away from acknowledging the potential impact of this scenario on the public finances and must ensure that any takeover is in the public interest and does not line the pockets of financial institutions further to the detriment of customers and operational performance”.
UK Trade secretary to push for timeline on US tariff exemption
The OECD’s new economic forecasts were released as it begins a Ministerial Council Meeting in Paris today.
The UK’s trade secretary, Jonathan Reynolds, is attending, and is due to meet his US counterpart to try to agree a timeline to exempt Britain from America’s steel and aluminium tariffs.
Reynolds is expected to meet his US counterpart, Jamieson Greer, at the OECD meeting in Paris next week to discuss tariffs.
Last weekend, a UK government spokesperson said:
“The UK was the first country to secure a trade deal with the US earlier this month and we remain committed to protecting British business and jobs across key sectors, including steel.”
“We are engaging with the US on the implications of the latest tariff announcement and to provide clarity for industry.”
Last week, Trump unexpectedly doubled the tariffs on steel and aluminium imports to 50%; those levies are due to come into effect on Wednesday.
Updated
Clean water campaigner Feargal Sharkey is calling for the UK government to end the ‘debacle’ at Thames Water and put it into special administration, after KKR dropped out of the rescue deal (see earlier post).
Govt needs to put an end to this debacle and it needs to do so today.
— Feargal Sharkey (@Feargal_Sharkey) June 3, 2025
Time for govt to put @thameswater into special administration. https://t.co/GQ2aF4sRWk
Back in the water industry, some of Thames Water’s bond prices have slumped to record lows this morning after private equity firm KKR dropped out of the rescue deal for the utility firm.
Reuters has the details:
KKR’s withdrawal sent Thames’ 2040 bond down 4 pence in the pound to 69 pence, while its euro-denominated April 2027 bond dropped 2 euro cents to just under 68 cents.
US Commerce Secretary Lutnick 'very optimistic' of trade deal with India
US commerce secretary Howard Lutnick has declared that he is “very optimistic” of reaching a trade deal with India soon.
Speaking at the annual summit of the US-India Strategic Partnership Forum in Washington last night, Lutnick said:
“You should expect a deal between the United States and India in the not-too-distant future because I think we found a place that really works for both countries.”
I spoke at the U.S.-India Strategic Partnership Forum Annual Leadership Summit tonight.
— Howard Lutnick (@howardlutnick) June 3, 2025
We have a great relationship between our countries. I’m optimistic for a trade deal soon that will benefit both nations.
🇺🇸🇮🇳 pic.twitter.com/BCO8UYx7Wc
OECD: US effective tariff rate highest since 1938
The OECD also show how the United States’s effective tariff rate had risen to 15.4% by mid-May, up from just over 2% in 2024.
That’s the highest rate since 1938, after the Great Depression, when the Smoot-Hawley Tariff Act had significantly raised tariffs on imported goods in the US, in a failed attempt to support domestic industry.
The OECD explain:
The US tariffs, together with retaliatory action by China, as well as more limited action by Canada, means that trade equivalent to over 2% of world GDP is now directly facing higher tariffs, pointing to much greater disruption than during the US-China trade tensions in 2018-19.
If current applied tariffs are sustained, effective tariff rates are likely to fall over time, as trade in more heavily-tariffed goods is likely to slow.
This chart, from the OECD’s new economic forecasts, show how trade policy uncertainty has surged this year:
OECD: US growth is expected to slow markedly
US economic growth is expected to slow markedly to 1.6% in 2025 and 1.5% in 2026, the OECD says.
That’s relatively weak growth by recent standard, and slower than the “robust” growth of 2.8% recorded in 2024.
The OECD says the slowdown is due to the “substantial increase” in the US effective tariff rate on imports, and the impact of retaliation from some trading partners.
It also cites “high economic policy uncertainty, a significant slowdown in net immigration, and a sizeable reduction in the federal workforce”, a nod to Donald Trump’s clampdown on workers entering the US and Elon Musk’s DOGE cost-cutting drive,
The OECD adds:
Annual headline inflation is set to pick up to 3.9% by end-2025 due to higher import prices but is expected to ease throughout 2026, aided by moderate GDP growth and higher unemployment.
Risks to the growth projection are skewed to the downside, including a more substantial slowing of economic activity in the face of policy uncertainty, greater-than-expected upward pressure on prices from tariff increases, and large financial market corrections.
The OECD has also cut its forecast for UK growth in 2025 and 2026, due to the damage caused by Donald Trump’s tariff war.
It has downgraded its expectations for this year and next from a forecast made in March; UK GDP growth is now projected to be 1.3% in 2025 before slowing to 1.0% in 2026.
Constraints on Whitehall spending and higher than expected inflation also played a part in a downgrade, the OECD said. More here:
Updated
OECD cuts global growth forecasts due to trade war slowdown
Newsflash: Global growth will slow this year as Donald Trump’s trade wars hit the world economy, a new report says.
The Organisation of Economic Cooperation and Development (OECD) has cut its forecasts for growth in 2025 and 2026, and warned that the global outlook is becoming “increasingly challenging”.
The OECD now predicts that global GDP growth will slow from 3.3% in 2024 to 2.9% this year and in 2026, “on the technical assumption that tariff rates as of mid-May are sustained despite ongoing legal challenges”.
In its latest global economic outlook, just released, the Paris-based thinktank explains:
The slowdown is concentrated in the United States, Canada and Mexico, with China and other economies expected to see smaller downward adjustments.
Back in March, the OECD had predicted that global GDP growth would slow to 3.1% in 2025, and then to 3.0% in 2026.
Today, it warns that global trade growth is likely to slow substantially over the next two years, after a burst of activity earlier this year as firms tried to stock up on goods ahead of tariff increases.
It says:
Substantial increases in barriers to trade, tighter financial conditions, weaker business and consumer confidence and heightened policy uncertainty will all have marked adverse effects on growth prospects if they persist.
Higher trade costs, especially in countries raising tariffs, will also push up inflation, although their impact will be offset partially by weaker commodity prices.
Here are the OECD’s latest growth forecasts:
Uncertainty is expected to hold back business investment, the OECD adds.
It fears that further increases or swift changes in trade barriers could intensify the growth slowdown and trigger significant disruptions in cross-border supply chains, and that the tariffs could push up inflation expectations, leading to higher interest rates and lower growth.
But on the upside, a reversal of the increase in trade barriers would support growth and reduce inflation, the OECD adds.
Updated
Thames Water don’t disclose why KKR chose to walk away from talks to inject desperately needed fresh equity into the company.
Two weeks ago, Bloomberg reported that KKR’s proposal involved slashing about £8bn of Thames Water’s debt. The US investment group had been chosen by Thames to lead the company’s turnaround after it offered to put £4bn into the company.
Negotiations with regulator Ofwat had been expected to run throughout June, so today’s news that KKR have walked away is a surprise….
Analyst: China manufacturing slump is "canary in the trade war coal mine"
The slump in China’s manufacturing PMI (see opening post) is “a canary in the trade war coal mine,” says Stephen Innes, managing partner at SPI Asset Management.
The poor bird’s feathers have been “scorched by tariffs and global uncertainty”, Innes reports, explaining:
The Caixin Manufacturing PMI’s plunge to 48.3 isn’t just a weak print—it’s a body blow to the backbone of China’s economy: small and mid-sized exporters now caught in a brutal vice grip between faltering global demand and a Washington-led tariff regime that’s more carrot-and-stick diplomacy than ceasefire.
Water industry needs 'fundamental reset', report warns
Elsewhere in the water industry, a new report has warned that the water sector in England and Wales needs a “fundamental reset”.
In an interim report published on Tuesday, the Independent Water Commission says the water sector has been beset by “deep-rooted, systemic” failures.
The Commission says wide-ranging and fundamental change is needed in five areas – including clearer direction from government, stronger regulation of water companies, bringing decisions on water systems closer to local communities, and greater focus on responsible, long-term investors.
The report also singles out regulation, saying that Ofwat needs to embrace a “supervisory approach”, so it can intervene early before problems arise. The current model relies heavily on ‘comparability’ – benchmarking companies against one another to assess efficiency and justify customer bills, the Commission says.
Independent Water Commission chairman Sir Jon Cunliffe said he had heard a “strong and powerful consensus” that the system was not working for everyone.
Cunliffe:
“There is no simple, single change, no matter how radical, that will deliver the fundamental reset that is needed for the water sector.”
“We have heard of deep-rooted, systemic and interlocking failures over the years – failure in Government’s strategy and planning for the future, failure in regulation to protect both the billpayer and the environment and failure by some water companies and their owners to act in the public, as well as their private, interest.
“My view is that all of these issues need to be tackled to rebuild public trust and make the system fit for the future. We anticipate that this will require new legislation.”
KKR pulls out of a deal to inject fresh equity into Thames Water
Newsflash: Thames Water’s efforts to avoid nationalisation have taken a blow.
US investment firm KKR has walked away from the chance to take a stake in the troubled water utility, putting its future in fresh doubt.
Thames had selected KKR as a “preferred partner” at the end of March, as it looked for a partner to take a stake in its business.
But today, Thames told the City that KKR has indicated that it will not be in a position to proceed, and its preferred partner status has now lapsed.
Sir Adrian Montague, Chairman of Thames Water, says:
“Whilst today’s news is disappointing, we continue to believe that a sustainable recapitalisation of the Company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal.
The Company will therefore progress discussions on the senior creditors’ plan with Ofwat and other stakeholders. The Board would like to thank the senior creditors for their continuing support.”
Thames, which is struggling under a debt pile of close to £20bn, also says that “certain senior creditors” have been working on alternative transaction structures to seek to recapitalise the business. It will now “progress discussions on the senior creditors’ plan with Ofwat and other stakeholders,” it says.
Significant announcement from troubled Thames Water. Its preferred equity partner KKR has pulled out of plans to invest billions the company requires to survive. "KKR has indicated that it will not be in a position to proceed". https://t.co/SdT7bfZgpb
— Paul Kelso (@pkelso) June 3, 2025
If a deal can’t be reached, and Thames falls into bankruptcy, then the company could be takenn into a special administration regime by the UK government.
Updated
Introduction: China’s May factory activity shrinks as tariffs hit demand
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Evidence is mounting that Donald Trump’s trade war is disrupting manufacturing activity around the globe.
China’s manufacturing activity in May shrank at its fastest pace in two and a half years, according to the latest survey data, as firms were hit by a fall in new orders, and weaker export demand.
The Caixin/S&P Global manufacturing purchasing managers’ index, released this mornng, fell to 48.3 in May, down from 50.4 in April. Any reading below 50 shows a contraction, and this is the lowest reading since September 2022.
During April, the US and China imposed tit-for-tat tariffs on each others exports, resulting in triple-digit levies, before the two sides reached a deal on 12 May to lower those tariffs to 10% for 90 days.
Today’s PMI report indicates the Trump trade war hurt demand.
Dr. Wang Zhe, senior economist at Caixin Insight Group, explains:
“Overall, in May, manufacturing supply and demand declined, dragged by overseas demand. Employment continued to shrink, while prices remained weak. Logistics were delayed moderately, with manufacturing stocks remaining stable. Business optimism recovered slightly from April’s low.
“Currently, unfavorable factors affecting China’s economic development remain relatively prevalent. Uncertainty in the external trade environment has increased, adding to domestic economic headwinds
“Major macroeconomic indicators showed a marked weakening at the start of the second quarter. The downward pressure on the economy has significantly intensified compared to preceding periods.
Yesterday, a survey of US factories also showed a drop in production last month, with several manufacturers blaming tariffs for pushing up prices and hitting demand.
That helped to push the US dollar close to a three-year low against a basket of other currenciess.
The agenda
8am BST: OECD begins Ministerial Council Meeting in Paris
8am BST: OECD to release latest global economic outlook
10am BST: Eurozone inflation flash reading for May,
10.15am BST: UK Treasury committee hold hearing with Bank of England policymakers