The British economy is on course to expand by 1.5% this year after the budget gave a boost to public spending but could be blown off course if Donald Trump goes ahead with threatened tariffs, a leading economic thinktank has warned.
In a boost to Rachel Reeves after a bruising month of negative economic figures, the National Institute of Economic and Social Research (NIESR) upped its annual growth prediction from 1.2% to 1.5%.
However, it cautioned that an expansion of tariffs after the US president’s 10% levy on imports from China and 25% on Canada and Mexico – now paused for a month – could reduce the pace of growth to 1.3%, and by more if they hit UK businesses directly.
On Monday, Trump announced a 25% tariff on steel and aluminium imports from 12 March, which will hit UK steelmakers and heighten fears that similar sanctions could be extended to other sectors.
The thinktank said sterling could fall as the US president’s protectionist policies began to bite, increasing the cost of imports and pushing up inflation.
A separate survey by the British Chambers of Commerce (BCC) found that 63% of manufacturers exporting to the US expected to be affected by US tariffs, while 34% of all UK businesses polled feared some kind of hit.
In a snapshot of industry after Trump’s announcements, firms reported being concerned about the direct cost of tariffs as well as the wider effect on the global demand for their products.
William Bain, head of trade policy at the BCC, said: “We have entered a new global era when it comes to tariffs after a prolonged period where trade liberalisation 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.”
NIESR said the increase in inflation from trade tariffs would restrict global economic growth this year to 3.2% – the same as 2024 – and to 3.1% in 2026.
In the UK, the pressure on prices from US tariffs would be added to increased government spending, which NIESR said would prevent the Bank of England from making steep cuts to the cost of borrowing.
“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,” it said.
Interest rates will fall only once more in 2025, to 4.25%, and then settle at 4% next year, according NIESR’s quarterly health check, dashing the hopes of businesses and households craving lower borrowing costs.
That forecast of a single quarter-point cut is at odds with betting on the path of interest rates by City investors, who expect two cuts this year when policymakers meet in May and August.
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The Bank of England cut interest rates from 4.75% to 4.5% earlier this month and halved its 2025 UK growth forecast to 0.75%. NIESR said that was overly pessimistic when the government planned to inject up to £70bn into the economy after Reeves’s budget in the autumn.
It said the chancellor would enjoy higher tax receipts, allowing her to meet budget rules that committed the government to balancing day-to-day income and expenditure and bringing down overall debt by the end of the parliament.
A measure of economic growth per person will increase by 1% this year, helped by above inflation increases in wages that will push real disposable incomes up by 1.9%, it added.
Last week, the Office for Budget Responsibility delivered its initial draft view on the public finances to the Treasury. Bloomberg sources claimed it showed a small deficit, necessitating further spending cuts. However, that could be revised away if conditions improved by the time of the final forecast, on 26 March.
On Tuesday, Catherine Mann, a member of the central bank’s rate-setting monetary policy committee, said in a speech that she had supported a larger cut in interest rates last week in response to a weakening economic outlook that would be characterised by lower wages growth and weak inflation.
However, Mann, a former City economist, said it would not be clear how much further rates would fall until later in the year, when the impact of lower wages would be felt.
Article by:Source: Phillip Inman
