Economic outlook: Tariffs, NIC Increases, and what lies ahead

In the latest in the series of articles, Phil Eckersley, the former Agent for the Bank of England, considers the latest economic news. 

In my last piece I singled out a playlist of forthcoming events that were likely to have an impact on the near-term growth outlook for the UK economy.  The last few months have seen few changes to this playlist as the economy passes through a “phoney-war” prior to implementation/impact of – global trade tariffs, NIC increases and tightening fiscal constraints on public sector finances. With growth flat-lining, inflation easing up and labour market signals suggesting firms’ employment demand is weakening, 2025 may prove to be challenging. 

And so to tariffs…

Regardless of political stance, most economists, me included, would argue that imposing tariffs on trade is a bad idea.  Financial markets, fuelled by uncertainty and the flip-flopping of recent announcements, are already reacting to prospects of a slowing global economy.  One benchmark might be oil prices where a barrel of crude has been trading at levels not seen since late 2021 or recent evidence of $ weakness. Another might be financial market volatility, seen in bond and equity pricing,  which has been apparent in recent months.  Is there more cause for concern for the UK? Well yes, specifically, and apart from the obvious reciprocal effects leading to a reduction in overall trade flows, London and the UK more widely are exposed to the vagaries of US and reactive trade sanctions in areas such as ancillary business and financial services where the UK holds comparative advantage.  For instance, in areas such as marine, aviation and transport where fewer shipments reduces insurance premia and demand for related products such as credit risk and business interruption cover.

Imposing tariffs on imports raises inflation.  Recent analysis from Yale’s Budget Lab suggested that imposing tariffs on Mexican, Canadian and Chinese goods [as proposed] would add 1% to US domestic inflation, but in some areas (clothes, electronics and cars) the increase could be as high as 10%.  Commentators are also left wondering whether wisdom has been stripped of substance over the last few generations.  Economic historians will rightly point out that the imposition of tariffs in the late 1920/1930s led to global trade flows falling over 60%, across a relatively short time frame according to IMF and US government data.  Of course, some of these announcements contain an element of political posturing, with some signs that the US is prepared to row-back on the more draconian threats. That said, some damage has already been done.

Even for those in favour of tariffs, I would argue they are being poorly implemented. How are firms meant to plan supply chains, or manage trade payments, when 25pc levies are imposed, abandoned, and levied again at breakneck speed?

NIC increases

From FY 25/26 businesses will have to pay NICs for employees earning more than £5,000, down from £9,100 currently.  This will make it significantly more expensive to employ part-time workers. The first-order consequences of the policy are fairly obvious.  Firms will switch out demand with a likely reduction in employment levels – the BRC estimate that just over 1 in 10 part-time retail workers may lose their jobs, for example; and this before the impact of the higher National Living Wage.  Last month saw a host of retailers lobbying government to delay the implementation of these charges by phasing them in.  There are likely to be second-round effects of the rise in NICs. Firms faced with a squeeze on labour costs will likely deter investment and try to raise prices in an effort to recover lost profits.  This, in turn, may increase workers’ wage expectations.  It is also possible that firms could offshore jobs or invest overseas in preference to the UK, or they may delay or scale back on existing expansion plans in order to avoid the full impact of these charges.

Is it all bad news?

Some parts of the economy will remain resilient to the onset of weakening or falling economic growth. These sheltered sectors are often involved in public sector activities or in parts of the economy where demand is more stable and less-cyclical, such as those involved in maintenance and servicing, education and training, repair, and the so-called sin industries (alcohol, gambling and tobacco); all have relatively more robust fortunes in straightened times.  Furthermore, the South-East and Greater London typically fare better than other parts of the UK by enjoying comparative advantage in a number of areas.  These include: more activity in diverse and higher value sectors; having a highly skilled workforce; housing and associated wealth effects; the relative attractiveness of international capital flows; as well as the public sector anchor.  The list is quite extensive and should give some cause for optimism for firms operating in this part of the UK.    

Anything else?

Firms need to check their finances.  Research consistently shows firms typically fail due to some combination of cash flow mismanagement, demand weakness, and poor leadership.  And while economic conditions and external shocks can often accelerate decline, the most common cause of collapse is cash flow failures, including excessive debt.  Companies should check balance sheet stability as the economy enters a period of uncertainty.

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