UK economic growth to be slower than forecast due to tariffs, say economists

Independent

03-04-2025

UK economic growth could be up to 0.5 percentage points lower than expected in the coming years due to US President Donald Trump's tariff plan, economists have warned.
In his 'liberation day' announcement, Mr Trump slapped a 10% tariff on US imports of UK goods, as he hit out at 'exorbitant' VAT rates.
It came as he announced heavier tariff plans on a raft of other countries, including a 20% tariff on imports from EU nations.
Nevertheless, UK car manufacturers will be hit by a 25% tariff on all foreign cars imported to the US, which experts have said could put 25,000 UK jobs at risk.
Experts stressed that the UK has avoided a 'direct blow' but will still face a 'significant' impact.
Thomas Pugh, economist at RSM UK, said: 'The direct impact on the UK is likely to be in the 0.2% to 0.5% of GDP range over the next few years combining both the impact of the 10% flat tariff and the 25% tariff on automotives.
'The impact will be bigger once the hit to the US and European economies becomes clearer and is taken into account.
'Given we expect growth of 1% this year and 1.5% next year, it implies another year of stagnation at best.'
He added that he believes the impact of the tariffs will be 'not far off' wiping out Chancellor Rachel Reeves' fiscal headroom in the next budget in the autumn.
Pantheon Macroeconomics' Rob Wood suggested the economic impact would be less heavy but indicated it could result in more cuts to interest rates.
'Surging uncertainty ahead of President Trump's tax salvo had already been weighing on growth and the UK got away relatively lightly with a 10% tariff,' he said.
'For now we shave our 2025 growth forecast to 0.9%, from 1.1% previously.
'Markets are right to price in more UK rate cuts in 2025 – 2.4 more cuts now expected, compared to 2.0 three days ago – given that we have seen growth damaging tariffs and little retaliation, which would boost near-term inflation and create more of a stagflationary supply shock outside the US.'
Economists have said the UK currently exports around £60 billion in goods to the US, including pharmaceuticals, cars and technology equipment.
Experts have indicated the impact of the tariff plans will not be as bad as many had feared.
The UK's official economic forecaster, the Office for Budget Responsibility, warned last month that a more severe scenario, in which the UK and other nations also retaliated to the imposition of tariffs, would have dragged UK GDP 0.6 percentage points below forecasts this year.
It had said this would have had a one percentage point impact next year, and 'almost entirely eliminate' the Chancellor's £9.9 billion headroom against her fiscal rules.
Economists said UK firms still face significant uncertainty despite avoiding the 20% tariff scenario that some had feared.
Barret Kupelian, chief economist at PwC, said: 'The UK avoided a direct blow – but the global economy has taken a substantial hit.
'For the UK, the impact is significant – though less severe than for some other countries.
'In the short term, businesses face a sharp rise in uncertainty.'
UK business leaders have called for the UK Government to avoid further escalation in order to limit the economic impact of the policy announcement.
Rain Newton-Smith, chief executive of the CBI (Confederation of British Industry), said: 'A cool and calm reaction from the UK Government is the right response: UK firms need a measured and proportionate approach which avoids further escalation.
'Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices.'