The UK economy is projected to expand by 1.5% in 2025, bolstered by increased public spending following the latest budget. However, a leading economic thinktank, the National Institute of Economic and Social Research (NIESR), has warned that this growth could be derailed if former US President Donald Trump follows through on his proposed tariffs.
In a boost for Chancellor Rachel Reeves after a string of disappointing economic indicators, NIESR has revised its growth forecast upward from 1.2% to 1.5%. However, the thinktank cautioned that Trump’s trade policies could curb this momentum.
His administration’s recent 10% levy on Chinese imports and 25% tariffs on goods from Canada and Mexico — currently paused for a month — could slow UK growth to 1.3%. The economic impact could be even more severe if further tariffs directly target British businesses.
Trump’s announcement of a 25% tariff on steel and aluminium imports, set to take effect on March 12, has heightened concerns for UK steelmakers. Analysts fear this move could set a precedent for additional trade barriers impacting other industries.
The NIESR report suggests that the uncertainty surrounding US trade policy may also weaken the British pound. As a result, import costs could rise, leading to inflationary pressures. If these trade disruptions escalate, they could drag down global economic growth, which NIESR estimates will remain at 3.2% in 2025 before dipping to 3.1% in 2026.
A separate survey by the British Chambers of Commerce (BCC) revealed that 63% of UK manufacturers exporting to the US anticipate being affected by the tariffs. Additionally, 34% of all UK businesses surveyed expressed concerns over the wider implications of trade restrictions.
William Bain, head of trade policy at the BCC, remarked, “We have entered a new global era when it comes to tariffs after a prolonged period where trade liberalization has been the watchword.”
“There is still a lot of uncertainty around what is going to happen, especially as the US approach appears to have both trade and geopolitical aims. The announcement of steel tariffs shows how quickly the landscape can change.”
William Bain
Inflation, Interest Rates, and Economic Stability
The combined effects of heightened government spending and inflationary pressures from tariffs may prevent the Bank of England from implementing significant interest rate cuts.
“If domestic and international inflationary pressures intensify, driven by budget measures and higher tariff-related costs respectively, interest rates will need to remain higher for longer. This would likely dampen prospects for economic growth by slowing down business investment and consumer spending.”
National Institute of Economic and Social Research (NIESR)
The thinktank projects that interest rates will drop only once in 2025, settling at 4.25%, before further declining to 4% in 2026. This forecast is at odds with expectations in the financial markets, where City investors are betting on two rate cuts this year, likely in May and August.
Last month, the Bank of England reduced interest rates from 4.75% to 4.5%, a decision accompanied by a downward revision of its 2025 UK growth forecast to 0.75%. However, NIESR considers this outlook too pessimistic, given that the government intends to inject up to £70bn into the economy through Reeves’s upcoming budget.
The government is expected to benefit from increased tax revenues, allowing it to balance day-to-day expenses while gradually reducing the national debt. NIESR projects that economic growth per capita will rise by 1% this year, driven by real disposable income gains of 1.9% due to wage increases outpacing inflation.
Recent reports indicate that the Office for Budget Responsibility has submitted its initial assessment of public finances to the Treasury. Sources suggest that while the initial figures show a small deficit, the situation could improve before the final budget forecast is released on March 26.
On Tuesday, Catherine Mann, a member of the Bank of England’s monetary policy committee, voiced concerns about the economic outlook. She stated that she had supported a more substantial interest rate cut last month due to weakening economic conditions, characterized by lower wage growth and subdued inflation. However, she acknowledged that the extent of future rate cuts remains uncertain and will depend on economic performance in the coming months.
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