UK Growth Forecast Revised Upward
The British economy is now expected to expand by 1.5% in 2025, according to a new report from the National Institute of Economic and Social Research (NIESR). This marks an upgrade from the previous 1.2% estimate, largely attributed to increased public spending following Chancellor Rachel Reeves’s budget measures.
The more optimistic outlook is welcome news after a month of disappointing economic figures, but NIESR warns that global trade tensions could derail the recovery. Specifically, President Donald Trump’s aggressive tariff policies—such as the newly imposed 25% levies on steel and aluminum—could shave growth down to 1.3% or lower if UK businesses are directly affected.
Tariffs Could Disrupt UK Businesses
Trump’s recent trade actions, including a 10% tariff on Chinese imports and planned 25% tariffs on Mexico and Canada, have already been paused temporarily, but their long-term impact remains uncertain. The thinktank warns that if protectionist policies intensify, the British pound could weaken, raising import costs and driving inflation higher.
According to a survey by the British Chambers of Commerce (BCC), 63% of UK manufacturers exporting to the U.S. expect to be affected by these tariffs, while 34% of all British businesses anticipate some level of disruption. The direct costs of the tariffs, along with the broader effects on global trade demand, are raising concerns among industry leaders.
“We have entered a new global era when it comes to tariffs after a prolonged period where trade liberalisation has been the watchword,” said William Bain, head of trade policy at the BCC. “There is still a lot of uncertainty around what is going to happen, especially as the U.S. approach appears to have both trade and geopolitical aims.”
Interest Rate Cuts May Be Limited
Higher inflation from trade tariffs could further restrict economic growth, with NIESR predicting that global GDP expansion will remain at 3.2% in 2025, the same as the previous year. The report also suggests that the Bank of England will have little room to maneuver in cutting interest rates, keeping them at relatively high levels for longer.
Currently, NIESR expects only one additional rate cut in 2025, bringing borrowing costs down to 4.25%, before settling at 4% in 2026. This projection is more conservative than City investors’ expectations, which anticipate two cuts this year in May and August.
The Bank of England has already lowered rates once this year, reducing them from 4.75% to 4.5%. However, it also slashed its 2025 UK growth forecast to 0.75%, a figure that NIESR believes is overly pessimistic given the government’s planned £70 billion fiscal injection.
Public Spending and Wages Offer Some Relief
Despite the risks, the UK economy is expected to see a 1% rise in growth per capita this year, supported by wage increases that are projected to outpace inflation. NIESR estimates real disposable incomes will climb by 1.9%, providing some relief to British households.
The government’s ability to manage spending effectively will be critical, with higher tax receipts helping Chancellor Reeves meet budget rules on reducing overall debt. However, uncertainty remains over how economic conditions will evolve, particularly with Trump’s trade policies still unfolding.
Looking Ahead
With the next full forecast due on March 26, businesses and policymakers will be closely watching developments in the U.S. trade stance and inflation trends. Catherine Mann, a member of the Bank of England’s monetary policy committee, has suggested that further rate cuts could be considered if wage growth weakens later in the year.
For now, the UK economy appears resilient, but external pressures—particularly from U.S. tariffs—could present significant challenges in the months ahead.