Higher tariffs damage UK growth prospects

We’ve cut our UK GDP growth forecasts for the rest of 2025 and 2026 in response to the recent US tariff announcements. We now expect growth of 1% this year and 0.9% in 2026.

We expect US demand for UK goods will drop sharply in response to the increase in relative costs for UK-produced products and the large real income shock that US consumers will suffer. Global demand will also be softer. Our new forecast for UK non-fuel goods exports at the end of 2026 is more than 5% lower than our March projection. A prolonged period of trade policy uncertainty will also doubtless weigh on business sentiment at a time when profitability is already under severe pressure.

We’ve nudged down our inflation forecast due to lower oil and gas prices and a stronger pound, but the degree of uncertainty is high. Some imported goods could become cheaper as firms target non-US markets; conversely, supply chain disruption could stoke inflationary pressures.

We’re sticking with our call that the Bank of England will cut interest rates by another 75bps this year, with Bank Rate ending 2025 at 3.75%. The tariff increases are a demand shock to the UK economy, calling for looser policy. But we think concerns about the weakness of supply could encourage the Monetary Policy Committee to adopt a more cautious approach.