Support
- Economic Reports
- Market Research

UK in Focus

13 February 2025

Article

3 minutes

3 minutes
Article

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.

Disclosure appendix

Analyst Certification

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

Important disclosures

This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.

Additional disclosures

This report is dated as at 03 February 2025.
All market data included in this report are dated as at close 31 January 2025, unless a different date and/or a specific time of day is indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.

Support
- Economic Reports
- Market Research