The UK economy growth is on course to grow by 1.5% this year, after an optimistic revision in its growth forecast, thanks to a boost in public spending. However, the outlook could face setbacks if the US proceeds with threatened tariffs on goods, a prominent economic think tank has warned.
Following a difficult period defined by poor economic data, the National Institute of Economic and Social Research (NIESR) boosted its annual growth projection for the UK economy from 1.2% to 1.5%, therefore providing some hope. However, the NIESR issued a warning: should US President Donald Trump intensify his protectionist trade policies, the global economic scene would change rapidly. Should UK businesses suffer direct consequences, his possible decision to apply more tariffs might slow down the rate of economic growth in the country to 1.3%.
How might US tariffs affect UK growth?
Trump declared on Monday a 25% duty on imports of steel and aluminum, which will impact UK manufacturers and increase concerns of more general sanctions across many industries. These fresh taxes are scheduled to start on March 12. Although the tariffs were first shelved for one month, the effects of such protectionist policies are already being felt in the economy.
The NIESR cautioned that if Trump’s policies spread to other sectors, particularly considering the US president’s protectionist stance may cause the value of the British pound to decline, therefore indicating a possible recession. The decline in sterling could result in more imports and an inflationary surge, therefore slowing down the expansion of the UK economy.
With 34% of all UK businesses worried about a negative impact and 63% of UK manufacturers exporting to the US expecting to be negatively impacted by the US tariffs, a poll conducted by business organisations revealed. Companies polled showed concern not only about the direct financial cost of tariffs but also about more general effects including a decline in world market for their goods.
How might Trump's trade policies have long-term effects?
Head of trade policy for a prominent trade association William Bain said: “We have entered a new global age when it comes to tariffs after a protracted period where trade liberalisation has been the watchword. Particularly as the US strategy seems to have both trade and geopolitical goals, there is still a lot of ambiguity over what will happen. The declaration of steel tariffs reveals the speed with which the scene can alter.
Rising inflation from trade tariffs is predicted to bring down the global economic growth rate to 3.2% in 2025, according to the NIESR; with an even slower growth estimate of 3.1% in 2026.
Will inflationary pressures stop development?
Rising government expenditure and US tariff inflationary pressures in the UK will probably prevent the Bank of England from significantly cutting borrowing costs. NIESR advised that interest rates would remain higher for a longer period should inflationary pressures rise both locally and abroad.
According to the think tank projection, the Bank of England would just once more lower interest rates to 4.25% in 2025. They are then predicted to steady at 4% in 2026. This projection runs counter to market forecasts, which call for two rate decreases in May and August later this year.
The Bank of England has dropped its UK growth projection for 2025 to just 0.75% and cut interest rates from 4.75% to 4.5%. NIESR, however, feels that the Bank’s assessment was unduly negative, especially considering that the government is pumping up to £70 billion into the economy, therefore promoting UK economic growth.
What Are the Government Debt and Tax Receipts Prospects?
While progressively lowering overall debt by the end of the parliament, Niesr also pointed out that the higher-than-expected tax receipts of the UK government will assist achieve her budget guidelines, which aim to balance daily income and spending. This is thus projected to support the fiscal situation of the government and enable increased public service and infrastructure expenditure.
With above-inflation pay rises helping to drive real disposable incomes up by 1.9%, economic growth per person in the UK is predicted to rise by 1% this year. Despite more general economic difficulties, this prognosis offers some hope for households.
Is government expenditure able to offset economic weakness?
With its early budget projection, the Office for Budget Responsibility (OBR) revealed a little shortfall suggesting perhaps more spending cuts needed. Nonetheless, sources said that should conditions improve by the time the final projection is released on March 26, this estimate could be changed.
Responding to a declining economic situation, Catherine Mann, a member of the Monetary Policy Committee of the Bank of England, voiced her support for a bigger interest rate drop on Tuesday. She saw that the economy in the next months was probably going to be characterized by slow inflation and declining wages development. She did, however, also point out that the full scope of the interest rate reductions would not be known until later in the year when the effects of reduced salaries become more pronounced.
In essence, even if UK GDP growth is temporarily increasing, external risks such US tariffs and inflationary pressures might generate major turmoil. To guide the UK economy during this difficult era, the government and the Bank of England could have to balance fiscal policy, interest rates, and public investment.
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