The looming threat of much higher tariffs amid Donald Trump’s trade war could lead to a fresh wave of companies going bust and cause financial losses for banks, the Bank of England has warned.
The Bank’s financial policy committee said a rise in trade levies would compound existing vulnerabilities, with the risks to global growth and inflation having grownas a result of the president’s ever-changing border tax rates and an escalating conflict in the Middle East.
In its financial stability report, the committee said the situation puts a range of companies at risk globally, particularly those with large debt piles. “The potential for much higher trade tariffs increases the likelihood of corporate default in the most exposed sectors, and losses for their lenders.”
The Bank said UK businesses as a whole appeared largely resilient amid the uncertainty, given relatively stable net debt levels, and that most British companies were able to withstand sharply higher tariffs even if their earnings fell by 10% and their borrowing costs surged.
However, it said that the overall picture could “mask vulnerabilities within particular firms and sectors”, including manufacturing and retail.
“Notwithstanding the trade deal between the UK and US, if the shock were to worsen, with greater than expected tariffs globally and larger than expected spillovers to world demand, it could impact UK corporates,” the committee said, including through weaker global demand, higher supply costs and fewer borrowing options, with banks and other lenders less willing to provide loans.
It added that further shocks could affect the UK manufacturers that rely on exports to the US, and retailers that depend on strong consumer demand and would struggle to offset losses by raising prices.
The Bank said its survey suggests that companies more vulnerable to a global trade shock, either directly or indirectly, account for about 60% of UK employment. Those businesses also accounted for about 30% of UK corporate debt.
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“Increased global fragmentation means that debt issuance could become more challenging for UK corporates in high yield and leveraged lending markets, which are largely reliant on international investors” the committee said.