UK economy at risk of higher inflation and slower growth due to Trump tariffs
Economists are concerned by the likely impact of Donald Trump’s economic policies on the UK following his historic election victory.
During the campaign, Trump threatened to increase tariffs on foreign imports by between 10-20 per cent while also placing 60 per cent tariffs on Chinese goods.
A tariff is a levy imposed on imports. By putting extra costs on businesses importing products from overseas, tariffs limit trade and lead to higher prices for consumers.
If Trump went ahead with his threats to impose blanket tariffs, economists agreed that the global economy would take a serious hit.
Analysts at Investec said there would be a “material increase in global inflation” from the duties as well as a big hit to GDP growth.
The bank projected that global GDP growth might be around one per cent lower between the second half of 2025 and the first half of 2026. Inflation may be around one per cent higher.
UK to be hit by Trump tariffs
The National Institute of Economic and Social Research (NIESR) warned that the UK would be particularly affected by Trump’s presidency.
“The UK is a small, open economy and would be one of the countries most affected,” Ahmet Kaya, principal economist at NIESR said.
The think tank projected that UK inflation could be as much as three to four points higher while interest rates could be two to three points higher as a result of the tariffs.
Growth in 2025 and 2026 would also be 0.7 per cent and 0.5 per cent lower than it otherwise would have been, NIESR projected.
“Trump’s proposed tariffs would be yet another shock to the UK economy. People in the UK would face higher prices for the products that they buy and would have less money to spend on other goods and services,” Kaya said.
However, not all economists thought the UK would suffer so badly. Research from Capital Economics last month suggested that the hit to UK growth from the tariffs would be “negligible”.
They pointed out that demand for UK products would likely be fairly inelastic, because the tariffs would put up the cost of imports from other countries too.
Interest rates in the US would likely have to be higher to temper inflation, which would weaken the pound and make UK exports a little cheaper for US buyers.
“Far from being a hit to UK GDP, a tariff on all US imports could boost the UK’s overall trade surplus with the US by £2.6bn,” Ashley Webb, UK economist at Capital Economics said.
“The boost to the UK’s total trade surplus could be bigger if the US tariff had a carve out for the UK,” he added.
Despite this, Webb still thought the UK would suffer from higher inflation because a weaker pound would make UK imports more expensive.
One thing economists agreed on was that it would be very difficult to predict Trump’s likely course of action.
The official Republican party platform was not specific on the extent of tariffs, stating instead that it would “support baseline tariffs on foreign-made goods”.
Investec suggested the policies might be “bargaining chips” for Trump to try and extract concessions from trading partners.
Its also unclear how other countries would respond to the tariffs, although it seems likely that there will be some retaliatory tariffs.
“The potential for an escalating tit-for-tat trade war between the US and its key trading partners casts uncertainty over the outlook for global trade and production,” Kallum Pickering, chief economist at Peel Hunt said.