When economic shocks are the norm, coordination trumps chaos

On Monday 7th April, Donald Trump wreaked havoc by whacking steep tariffs on the entire world. Three days later, he changed his mind. These chaotic pivots have massive implications for the UK economy, and we now seem to live in a world where frequent economic shocks are the norm. We need a crisis management playbook that is up to the task. The antidote to chaos is coordination, and NEF has a toolkit for just that.

If Trump presses ahead with tariffs, it will be bad for the UK economy. What the exact impact will be is uncertain, but the OBR’s latest forecast suggests a 0.6% hit to UK GDP in the short term, under a scenario where the US applies blanket 20% tariffs on goods from all countries. The IMF just downgraded the UK’s economic outlook as a result of the tariff announcements.

Asian markets may divert their exports, flooding the UK with cheaper goods. But as business uncertainty and supply chain fragmentation reduce production, some prices will rise. The higher uncertainty will also dampen demand, and until that demand rebounds, businesses will be less confident to increase supply. For the UK, that could mean recession.

In recent years, macroeconomic policy has fared poorly in tackling economic shocks. The 2008 financial crisis hugely restricted demand. In response, expansionary monetary policy — through unconventional asset purchases — did little to stimulate the economy. This is because it was coupled with austerity, which reduced government spending and contradicted the Bank of England’s efforts to stimulate demand.

More recently, efforts to reduce inflation – mainly by pushing up interest rates – have been employed to reduce demand by making saving more attractive and borrowing more expensive. However, recent inflation has been driven mostly by energy price shocks and supply chain constraints, rather than too much demand. And it has been further exacerbated by concentrated corporate power enabling firms to hike prices more than they need to. The effectiveness of the rate hikes is debatable, with the Bank’s monetary policy committee member Swati Dinghra suggesting ​“it may even be counterproductive” – making supply-side problems worse.

Approaching this type of supply-driven inflation with targeted fiscal policy in the form of price controls and reduced energy taxes, like Spain, Greece, the Netherlands and France have done, may have been more fruitful. These policies helped tackle price rises at the source and eased the pressure on interest rates, with the European Central Bank’s interest rate 2 percentage points lower than the Bank of England’s.

If governments and central banks were able to better coordinate on fiscal and monetary policy, they would get the best of both worlds — better outcomes on inflation and lower interest rates. Exactly how this coordination looks should reflect the causes of the inflation and shocks we see.

Figure 1: An illustration of effective monetary-fiscal coordination

Source: NEF (2025).

If the tariffs do go ahead, the Bank could cut rates as many as four times this year, which would ease pressures on mortgage-holders and businesses. In this scenario, demand would not be the driver of price increases, so stimulating it in this way would be unlikely to push prices higher. Rather, it would help support supply and keep the economy moving.

As the same time, to support individuals hit hardest by the shocks, the Chancellor would likely have to suspend her self-imposed fiscal rules and open up the fiscal space to make targeted interventions. This suspension could be triggered within the current fiscal framework but it should be a chance to rethink our fiscal rules that were not designed for an economy that is buffeted by shocks.

Additional fiscal space could be deployed to help support firms that are genuinely struggling. For example, the UK’s recent Energy Bills Discount Scheme was targeted at energy intensive industries and deployed in 2023 in the face of the energy price shock. Meanwhile, Europe’s Recovery and Resilience Facility, initially launched in response to the COVID-19 pandemic, has provided fiscal support to EU countries to enable them to aid businesses in light of recent shocks in a targeted way that makes most sense for them. In the medium term, increased fiscal space can be used to support UK’s upcoming industrial strategy — which will look to strengthen domestic production and reduce the UK’s reliance on volatile markets for critical supplies.

As well as fiscal policy via the government, monetary policy could also be deployed to help protect domestic industry in a complementary way. For example, the Bank could buy bonds from — or offer special discounted interest rates to – businesses investing in key sectors like green energy, which are vital for protecting us against future shocks.

In this way, fiscal and monetary policy – the government and the Bank – can work together in a targeted way to build our resilience against — and cope with the fallout of — economic shocks to come. This is a departure from the past, where fiscal and monetary responses have been uncoordinated (and in some instances undermined each other) and untargeted – reducing their effectiveness.

In response to the current crisis, Gordon Brown has called for coordinating macroeconomic and financial policies across continents. A paper from the European Parliament provides some interesting solutions to achieving that through cross-EU collaboration. But domestically, governments and central banks must take the chaos Trump is causing as an opportunity to foster stronger bonds and reimagine the policy combinations they can achieve. A unified, collaborative approach to domestic monetary and fiscal policy at home is essential in an increasingly shock-ridden world.