US-China trade war threatens £6 trillion global meltdown: WTO chief in stark warning as Fed braces for higher inflation and weaker growth

The escalating trade war between the United States and China could wipe £6 trillion off the global economy and trigger a brutal recession, says a leading international watchdog.

In a stark warning yesterday, the World Trade Organisation (WTO) said a full-blown schism between the two powerhouse nations could leave the global economy 7 per cent smaller than it would have been.

That would represent a reduction in output of around £6trillion over time – more than twice what the UK produces every year.

The warning came as investors bet that the Bank of England will use

the latest fall in inflation to press ahead with interest rate cuts to prop up the British economy in the face of the tariff onslaught.

Although the slide in inflation in March to 2.6 per cent is seen as temporary – with sharp rises in bills and taxes this month pushing up the cost of living once again – analysts believe a rate cut from 4.5 per cent to 4.25 per cent next month is all but certain.

And investors are betting there could be a further three this year, taking rates down to 3.5 per cent by Christmas – though some analysts see 3.75 per cent as a more likely outcome for the end of 2025.

Federal Reserve chairman Jerome Powell last night warned of ‘heightened uncertainty and downside risks’ to the US economy but added it remains ‘in a solid position’.

The US central bank chief said the economy ‘slowed in the first quarter from last year’s solid pace’ as households and business suffer ‘a sharp decline in sentiment...largely reflecting trade policy concerns’.

Despite the prospect of ‘higher inflation and slower growth’, Powell said the Fed was likely to keep interest rates steady ‘to wait for greater clarity before considering any adjustments’.

Trump’s to-ing and fro-ing on tariffs has seen many of the steepest levies paused, though a baseline 10 per cent applies to most goods entering the US.

The White House has also imposed extra duties on steel and cars, and is now threatening pharmaceuticals. There has been little let-up in the battle between Washington and Beijing, however, with the US slapping 145 per cent tariffs on Chinese goods, though there are exemptions for products such as smartphones.

China has hit back with 125 per cent duties on imports from the US.

The WTO, led by director-general Ngozi Okonjo-Iweala, now expects trade around the world to fall by 0.2 per cent this year having pencilled in an expansion of 3 per cent in October.

It warned that if Trump reintroduced the full rates of his broader tariffs, trade in goods would fall by 1.5 per cent, the steepest drop since the full force of the pandemic was felt in 2020.

Okonjo-Iweala said her greatest fear was that the economies of China and the US, the largest in the world, were ‘decoupling’.

‘A decoupling could have far- reaching consequences if it were to contribute to a broader fragmentation of the global economy along geopolitical lines to two isolated blocks,’ she said.

In this scenario, global GDP could shrink by 7 per cent in the long- term, which she described as ‘significant and substantial’.