Tariffs, trade deals, and the impact on business: UK Economic outlook

In the latest in the series of articles, Phil Eckersley, the former Agent for the Bank of England, considers the latest economic news and its implications for the business community.

In the last few months, the UK economy has experienced significant fall-out arising from the unleashing of a combination of the US tariff “liberation day”, higher rates for Employers National Insurance Contributions, increases to the National Minimum Wage and the squeeze on real disposable household income from higher inflation and fiscal drag.  The imposition of US tariffs sent global stock markets into a tailspin, undermining confidence and causing a volte face by the US administration.  The impact of these policies has weakened global and specifically UK growth prospects.  The Bank of England responded by reducing the bank rate by 0.25% to 4.25% on May 8th, in line with market expectations.

Tariffs – really?

In recent articles this column has highlighted the folly of imposing trade tariffs, primarily because they don’t work.  Nonetheless, April 2nd (presumably pushed back a day in case commentators thought it was an April fool!), saw the US administration announcing swingeing tariffs on all their major trading partners [and some of their minor ones], and regardless of the trade balance.  In the last eight weeks, the first only a week later when a 90-day suspension on retaliatory tariffs was announced, the narrative has continued to change with the flip-flopping of policy announcements undermining confidence in the US legislature.

In a further show of brinkmanship, early May saw the announcement of a US:UK trade deal which followed the agreement between the UK and India deal few days earlier.  Clearly this is good news, albeit not compared to the status quo.  In relative terms the UK has been forced to make concessions to avert significant trade barriers being erected in the case of the US.  In particular, [US] concessions on automotive and steel (up to the quota) will help reduce the impact of tariffs on those sectors, albeit agriculture has shouldered the brunt of the offsets.

So, what does this mean for the UK…?

A combination of second order policy impacts – for example with the EU and China – makes it tricky to predict the precise impact of US global policies on the UK economy, particularly as a number of agreements have yet to be announced. 

However, the headline rate of tariffs imposed on the UK has been set at a not-too-damaging 10% (subject to any further changes following the recent Court ruling in the US).  The importance under the new deal of negotiating away sector-specific tariffs on automotive and steel products at 25%, two of the UK’s main export sectors to the US, is clearly better news than planned at the beginning of April.  For example, for companies like Land Rover where US sales were over £9bn last year.  For its part, the UK may seek clarification that UK steel exports are exempt from the June 4th announcement that steel and aluminium import tariffs to the US will increase from 25% to 50%.

In contrast, the trade deal with India is much broader and relatively more important.  The agreement contains some fine details in non-monetary areas such as customs and digital trading systems that will help boost trade in spirits for example – India is the world’s largest whiskey market.  There is also provision to improve UK access to India’s services sector, an important step for the UK given it generates a surplus on tradeable services.

Economic and financial market uncertainty diffuses rapidly into capital markets with debt-laden companies looking particularly vulnerable. Capital markets operate more efficiently on certainty and price accordingly.  The current climate has already seen UK exporters, in particular, finding it harder to access finance and facing more requests for due diligence from lenders.  These issues will become more evident as loan agreements and revolving credit facilities come to an end and are likely to spill-over into domestic credit markets.

There is some potential downside news for UK inflation.  The prospect of eye-watering levies being imposed on Chinese goods destined for the US has led commentators to argue that these goods will find their way to UK markets at discounted prices, albeit the scale of the Chinese export price adjustment is very difficult to determine.  Of course, price reductions are possible but regulatory and practical issues (US drives on the other side of the road, for example) mean the impact is likely to be limited to specific products.

In terms of economic growth, the Bank of England May 2025 forecast suggested full tariffs would reduce GDP by 0.3% in the near term so the recent trade agreement with the US will probably improve this.

Finally, without wanting to be known as an advocate of the gloomy science, it’s probably true to say that there is an element of Finagles Law in play, ie something worse is just round the corner.  There are, for example, other sectors not covered by the UK:US trade deal that will come into sharper focus in due course – digital taxes, foodstuffs, tradeable services.

Monetary Policy – where are interest rates heading…?

Not for the first time in the last few years the Monetary Policy Committee (MPC) has faced a policy dilemma with above-target inflation and elevated wage pressures suggesting a need for tighter policy, while at the same time growth indicators suggesting further loosening.  On balance, the MPC opted for a slight easing in the bank rate on May 8th, although it should be noted the decision was a split one with a 5-4 vote (2 members opting for a larger 0.5% reduction).  The reduction seems sensible given the rate stills appears to be above the neutral rate – that is the theoretical rate that is consistent with full employment and low stable inflation.  The market-implied path for UK policy rates suggests the bank rate should be at 3.6% by the end of 2025, rising modestly to 3.7% by the end of the forecast period.  This is a reduction in the market-implied path to the one published back in February, reflecting the sharp rise in uncertainty and weakening growth prospects.

And inflation…?

For inflation, the path to the 2% target is likely to be uneven with developments in household energy bills likely to push up the Consumer Prices Index in Q3 2025.  The tick-up in CPI to 3.5% in April (data released mid-May) was slightly ahead of market forecasts.  However, this near-term blip in CPI is likely to be temporary as second-round effects are not as incendiary as the shocks experienced in 2021-22 when a tight labour market and supply shocks amplified the impact on pricing behaviours. 

In the current climate of heightened uncertainty and shifting trade dynamics, businesses must remain agile and proactive. Take time to reassess your supply chains and explore opportunities to diversify sourcing, particularly in sectors exposed to tariff volatility. Strengthen financial resilience by reviewing credit lines and ensuring access to liquidity, especially as lenders become more cautious and stay informed about sector-specific developments—such as digital trade regulations or services access in new markets such as India—that could offer competitive advantages. Finally, consider engaging with trade organisations or advisors to navigate the evolving regulatory landscape and to advocate for your sector’s interests in future trade negotiations. In times of change, informed and flexible strategies are your best defence.

If you would like to know more about the economic outlook in the UK and how it may affect you, please do register for either our upcoming Finance Focus for Finance Directors webinar, or our Finance Focus for Business Owners webinar. Alternatively, if you would like to speak to someone directly, please do get in touch.