The UK government has made faster economic growth their number one mission. But efforts to kickstart it have been repeatedly defeated from the course by a global economy that has fallen from one crisis to another.
On Thursday, British officials appeared to secure a victory. The country will announce some form of trade agreement with the United States that will mitigate the impact of recent rise in US tariffs.
President Trump said on social media on Thursday that the agreement with the UK will be “complete and comprehensive to solidify U.S.-U. relations with the UK for years to come.”
British officials have been negotiating in Washington for months as they tried to isolate their country from Trump's desire to restructure the global trade order. They also wanted to protect the economy that barely avoided a recession at the end of last year, and spent the course later this year for a relatively strong recovery.
However, authorities failed to secure the exemption last month when Trump hit a 10% “baseline” tariff he imposed on American trading partners.
The UK will also be subject to a 25% tariff on automobiles and steel, and its leaders are concerned about threatening tariffs on two important exports: medicines and films. Like other countries, trade uncertainties have led to reduced forecasts of economic growth in the UK.
Expected deals with the US are welcome in the UK for several reasons. It is likely that the overture will be evident that Prime Minister Kiel Starmer has established the president (including King Charles' invitation to visit the state), and may overshadow the setback in last week's local elections.
It can also support certain sectors, including the UK automotive industry. Autos account for around 10% of the value of British goods exports to the US. Many are luxury cars like the Jaguar, Aston Martins and Bentley, and are made with custom details in the UK. These automakers discovered that they were economically prohibited from moving production to the US, and then suspended their cargo there.
Trade contracts are also likely to terminate consumer and business sentiment, both of which have been hindered these days.
However, there are limits to how much the UK economy can be raised as a whole. Although the US is a key trading partner, trade flows were heavily skewed into services and were not affected by higher tariffs. The UK exported £137 billion worth of services to the US last year.
A recent survey by the National Bureau of Statistics found that over 60% of businesses report that they expect US tariffs to not affect next month.
The UK and the US have been negotiating trade for five years, but it is unlikely that the current transaction will become a full-fledged free trade agreement, like the UK and India, which we signed this week, to lower tariffs on a wide range of goods and increase access to many services. The even bigger prize for the UK will be closer ties with the European Union, which represents about half of British trade. Several advances in EU trading are expected at the UK summit later this month.
Trade uncertainty is also heavy at the Bank of England, cutting Thursday's quarterly points to 4.25%.
From last year, UK policymakers have carefully reduced the rates on concerns over prolonged price pressures and the expected short-term clash of inflation this year. However, some have recently highlighted the risks of economic growth due to trade uncertainty. This is expected to attenuate business investments and consumer spending. Overall, policymakers were divided into this decision. A majority of five members voted for the quarter point cut. The two voted to hold, and the two voted for the bigger cut.
Economists say the greater threat to the UK is the uncertainty that Trump's trade policy has created globally, not tariffs on the UK.
The UK is vulnerable to external shocks, and if others, such as the European Union or the US, fall into a recession, its economy will suffer.
“The UK story is not central to tariffs. It's a domestic factor,” said Benjamin Caswell, an economist at the National Institute for Economic and Social Studies. The UK's economic growth forecast was downgraded to 1.2% this year, predicting business reliability and higher cost pressure. Businesses also face higher taxes on wages, which came into effect last month and could boost inflation.
The dull outlook means the government could face a tax hike or cut public spending this year.
“Taxes create a lot of uncertainty, but I don't think it should let the government go off the hook,” Caswell said.
