US tariffs on UK exports could see GDP growth fall to 0.8% in 2025 and 2026

Source: ONS, KPMG forecasts. GDP, consumer spending and investment are all measured in real terms. Average % change on previous calendar year except for unemployment rate, which is average annual rate, while interest rate represents level at the end of calendar year. Investment represents Gross Fixed Capital Formation, inflation measure used is the CPI and the unemployment measure is LFS.

Higher tariffs to undermine growth

US tariffs on UK exports could see GDP growth fall to 0.8% in 2025 and 2026. A more severe scenario, if trade frictions continue to escalate, would worsen the outlook. Despite the relatively low rate of US tariffs imposed on UK exports compared to many other trading partners, the UK is expected to see a material hit to its economic growth over the medium term.

Higher tariffs on specific categories such as cars, aluminium and steel will more than offset the exemption on pharmaceutical exports, leaving the effective tariffs imposed on UK exports to the US at around 12%.

Yael Selfin, Chief Economist at KPMG UK, said: "Given the economic impact that tariffs would cause, there is a strong incentive to seek a negotiated settlement that diminishes the need for tariffs. The UK automotive manufacturing sector is particularly exposed given the complex supply chains of some producers.”

Public finances likely to be under further pressure

The underlying UK economic picture in the first half of 2025 is weak, with both hard economic data and soft survey evidence pointing to thin growth prospects across a range of economic sectors this year.

Global uncertainty and declining business sentiment have caused a weaker labour market and a slowdown of business investment growth, despite the gradual cuts to the Bank of England base rate.

UK public finances remain fragile after the Spring Statement which saw a modest downgrade in the outlook for the government’s finances due to worsening economic conditions. The UK fiscal framework and limited levels of headroom mean that the anticipated deterioration in the economic outlook would put further pressure on public finances. With downgrades to the OBR forecasts at the time of the Autumn Budget likely, the Government may need to respond with further spending cuts or tax increases.

Yael added: “The Chancellor faces a significant challenge to adhere to her fiscal rules while pursuing a growth agenda. The fiscal headroom remains tight while the risk of downgrade to the forecast is high.”

Monetary Policy: more easing of rates to come

Global central banks remain in the midst of a loosening cycle however heightened domestic and global uncertainty could make the Bank of England’s Monetary Policy Committee (MPC) more cautious about further rate cuts.

The pace of cuts over the coming MPC meetings will be determined by the extent to which the domestic shocks households and businesses are facing affect underlying inflationary pressures.

Inflation is expected to rise over the coming months, peaking at around 3.6% by the autumn, and remain slightly above target until mid-2026. Upward pressure to inflation will come from several sources, with households facing another steep rise in utility bills, while businesses look to pass on increases in labour costs.

The Bank is expected to lower interest rates in May, August and November, taking base rates down to 3.75% by the end of 2025. Next year we expect the Bank of England to cut interest rates twice more, with rates expected to settle at 3.25% over the coming years.

Yael concludes: “With interest rates currently in restrictive territory, a steady easing approach should help squeeze out remaining inflationary pressures while also continuing with a downward path towards a neutral monetary stance.”