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UK in Focus
A lack of growth and upside risks to inflation have weighed on sentiment so far in 2025. Despite renewed inflationary risks HSBC Global Research continues to judge that a softer labour market means the BoE will cut interest rates more than the market expects. So far, the UK has been spared from direct US tariff threats partly because the US runs a small goods trade surplus with the UK. While the risk of tariffs on the UK remain - most notably from a possible universal tariff of 10-20% - the UK may be more effected by indirect consequences of tariffs on other economies.
Sentiment in the trenches at the start of 2025
An (un)healthy dose of the January blues has seen the UK economy mired in weak sentiment in recent weeks. Business and household surveys have fallen sharply while economic growth appears to have ground to a halt in H2 2024. GDP data for November showed just a 0.1% m-o-m rise, while price rises slowed to 2.5% y-o-y in December. But despite that moderation in inflation, a trio of fresh upward risks have emerged adding to fears of stagflation.
We judge that despite the prospect of higher near-term inflation that growth concerns and a softening labour market will enable the BoE to cut interest rates more meaningfully than the 80bp that the market currently expects. That could go some way in boosting sentiment as well as relieve some pressures in the government’s fiscal position. However, UK inflation expectations and sentiment more broadly have fallen foul of global developments as markets have sought to understand what the new Trump presidency will mean for the US and global economies. While the UK has been spared direct tariffs threats, for now, an uncertain global backdrop could provide a persistent volatile undercurrent for the UK economy throughout 2025.
Dealing with an “America First” agenda
The new Trump administration has hit the ground running with a flurry of policy actions. The latest big development is the announcement of 25% import tariffs on Canada and Mexico, and a 10% additional duty on Chinese imports, to take effect on 4 February. This could have meaningful effects on the economies involved.
There’s scope for further developments. Tariff threats on Colombia relating to deportation flights shows how trade policy is being used to exert leverage on non-trade issues. And it’s also worth noting a memo signed by President Trump outlining various trade reviews by 1 April 2025 – including into persistent trade deficits, Chinese trade, the US-Mexico Canada Agreement (USMCA), prospective new trade deals and more.
What could be in store for the UK?
The UK has so far been spared from such direct tariff threats, partly because the US runs a small goods trade surplus with the UK. But it could be affected if the US implements a universal 10-20% tariff that targets imports from all markets (not our base case), or if more targeted duties are implemented that affect key British export sectors.
For instance, President Trump recently said he plans to implement new tariffs on semiconductors, pharmaceuticals and steel to incentivise production to return to the US. For reference, the UK sent more than one-quarter of its pharma exports to the US in the year ended November 2024. Indeed, the NIESR estimates that UK GDP could be up to 2.5ppt lower after three years due to higher US tariffs (19 December 24).
President Trump has also directed the Treasury Secretary and US Trade Representative (once confirmed) to draw up plans for possible retaliatory measures against markets that impose digital services taxes (DSTs), which could affect the UK.
The UK’s DST raised GBP678m in tax revenue or 0.8% of total HMRC receipts in 2023/24, and a trade investigation initiated under the previous Trump administration found that the UK’s DST (and those of other European markets) did discriminate against US digital companies. This led the USTR (under President Biden) to propose 25% tariffs on a range of British products including clothing, footwear, furniture and make-up, but these were suspended until June 2024.
Negotiations won’t be easy
The good news for the UK is that it technically has trade talks open with the US, which could provide an avenue for bilateral negotiations and a path towards a limited trade deal. However, agricultural import standards and NHS access could be key sticking points. The UK could also come under pressure from the US to tighten up on Chinese trade, given it has notably refrained from levying high tariffs on Chinese-made EVs thus far, unlike the US, EU and Canada.
Like the EU, the UK could potentially consider buying more American gas to ward off tariff threats. However, the US is already the UK’s second-largest source of natural gas, behind Norway, and accounted for c25% of total UK natural gas imports in 2023.
Moreover, the UK will need to balance offering any potential concessions to the US with its ambitions to reset trading relations with the EU. This won’t be an easy feat given UK-EU relations are only just starting to thaw, with a bilateral summit planned for the spring.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks and Shanella Rajanayagam
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- This report is dated as at 03 February 2025.
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