How will US tariffs impact the UK economy?

The UK could also pursue closer ties with the EU: The government plans to strike a veterinary agreement, and Chancellor Rachel Reeves has hinted at regulatory harmonization in the chemicals sector. But the growth boost from these developments wouldn't be enough to meaningfully reduce the costs of Brexit, and it could run counter to closer trading relations with the US.

The outlook for the UK budget

The UK’s autumn budget was more expansionary than expected, raising the prospect of stronger demand in the near-term. Even so, the updated plans still indicate consolidation in 2025, and growth is expected to cool in the second half of the year. The Office for Budget Responsibility will deliver a forecast update in the spring, which will be closely watched by markets.

“The government has left limited headroom against its new fiscal targets, and relatively small changes in the OBR’s macroeconomic forecasts could eliminate this headroom entirely,” Stehn writes.

Our economists think economic growth may prove lower than the OBR’s projections, increasing the chances that the OBR will revise its debt-to-GDP forecast upwards.

Planning reform could gradually boost UK GDP growth

The government also intends to reform the planning system for housing and development. Although it’s difficult to quantify the effect of the reforms without further policy details, our economists broadly expect the changes to result in a boost to residential investment over the next five years.

But the impact of any planning reforms on GDP growth over the medium term will depend on whether they increase labour productivity. A range of studies show that wages and productivity are higher in large cities, so relaxing planning restrictions could boost aggregate productivity by allowing urban areas to expand.

“Some studies have indicated that this effect could be sizeable in the very long run,” Stehn writes. “But we would expect any boost to productivity to occur gradually over an extended period of time.”

Inflation is forecast to ease in 2025

Inflation is expected to be firmer in the near term, easing throughout 2025. Public sector pay deals and government consumption following the autumn budget will support strong demand, while increases in vehicle excise duty and the introduction of VAT on private school fees could drive up prices in the services sector.

Nonetheless, Goldman Sachs Research sees domestic inflationary pressures falling back next year. Data from surveys conducted by the BoE suggest that tightness in the labor market is also likely to ease.

“This continued easing in labour market tightness — together with reduced catch-up effects now that inflation has returned close to target — are likely to result in a notable slowing in pay growth next year,” Stehn writes.

Reduced pay pressures are likely to result in services inflation declining gradually. This could lead to headline inflation undershooting the BoE’s latest projections: Our economists’ analysis puts headline inflation at around 2.3% in the final quarter of 2025, four-tenths below the BoE’s November forecast. They expect core inflation to fall to 2.5% by the end of next year.

The outlook for BoE rate cuts

Goldman Sachs Research expects the BoE to cut interest rates further and over a longer period than the market anticipates during this cutting cycle.

Our economists anticipate that the BoE will hold rates steady at 4.75% in December, given that inflation and growth are likely to remain firm in the near term. But with slowing inflation now likely in 2025, Goldman Sachs Research predicts quarterly cuts to interest rates throughout next year and into 2026, until the Bank Rate hits 3.25% in the second quarter of 2026.

U.S. Economic Developments: Soft Landing Prospects

Eurozone Inflation Dynamics

EURUSD H1 Chart

Japan’s Economic Challenges

Energy Markets and Commodity Currencies

AUDUSD & USDCAD H1 Chart

Key Market Movements and Trading Opportunities

US10YJPY Volatility: Expectations of a December BoJ rate hike has strengthened the Yen, but longer-term challenges may cap its gains.

BOJ Hike ExpectationsEUR Pressures: Inflation dynamics and uneven economic growth across the Eurozone add complexity for the Euro, offering tactical trading opportunities.Commodity Currencies: The AUD and CAD remain closely tied to commodity price movements, with geopolitical risks adding further unpredictability.

AUDUSD (Blue), USCAD (Pink) & GOLD Prices (Purple) Daily Chart

Actionable Strategies:

Donald Trump’s resounding victory has upset conventional economists almost as much as American liberals. The Republican candidate’s pledge to implement trade tariffs and other protectionist measures has provoked a spate of dire economic prognostications. But much of the current doom-mongery doesn’t consider mitigating factors — and risks undermining the credibility of globalisation’s defenders. These are difficult times for economic experts. Politicians hardly seem to take their advice seriously any more.

These are difficult times for economic experts

Economists continue to warn about the dangers of deglobalisation in the form of higher prices and less GDP growth, but electorates are rolling their eyes. Trump’s victory amplifies this trend. Some economists estimate that “blanket” tariffs on all imported goods will add up to a big hit to the global economy, leaving American and European households worse off. For example, the Peterson Institute for International Economics estimates that tariffs will add more than $2,600 in annual costs to the typical US household. The prestigious Wharton School at the University of Pennsylvania warns a trade war “could reduce GDP by as much as 5 per cent over the next two decades”. Not to be outdone, the IMF estimates US GDP will be 1.6 per cent lower by 2026 as a consequence of Trump-like policies.

However, there are a couple of problems in general with forecasting the impact of tariff rises. First, some forecasts do not always place enough emphasis on likely mitigants or the economic mechanisms that will soften the blow. For example, a stronger dollar would lower the inflationary impact of tariffs in the US, by reducing the effective price of imports of goods and services priced in euros or pounds. Corporates will certainly adapt and find ways to cushion the blow — rerouting the trade via other countries, adding more value in the US rather than at home — and economic simulations usually underestimate these. Also, monetary policy will help out. In Europe, for example, the European Central Bank could lower interest rates.

Second, Trump has also promised economically supportive policies, such as deregulating the energy sector, which could help cut prices, and also lower taxes, which would support net income. In addition, there is a big but well-known question mark over the extent to which tariffs will be implemented. Trump is a dealmaker; ergo, it seems reasonable to assume he will make deals. And, judging from his last administration, American corporates might be able to convince the president-elect of the negative impacts on their businesses given a huge share of imports are intra-company.

Economists’ forecasts sometimes sound worse to the average consumer than they probably are. For example, Wharton’s estimated 5 per cent GDP hit would occur over two decades; that hardly constitutes a crisis. Similarly, the IMF’s 1.6 per cent GDP decrease over two years is substantial but not enough to constitute a meaningful recession in itself.

The damage done by tariffs is likely to be slow and cumulative

Tellingly, the IMF does not expect Trump’s proposals to lead to significant inflation, but that has not been given much attention. And even the direst economic conjecture has not yet forecast price increases similar to those seen recently, particularly in energy and food. In sum, the shock effect of proposed tariffs is pretty slight compared with the economic stress that consumers and corporates have experienced over the past few years. To be sure, economists are not wrong to say protectionism comes with a hefty price. But, much like Brexit, the damage done by tariffs specifically and deglobalisation generally is likely to be slow and cumulative.

There are multiple downsides to presenting it as a shock. First, it reduces fragile confidence and thus, businesses and consumers may refrain from investing or shopping, hitting growth more than necessary. Second, governments may rush to policies and compromises that are overdone, such as concessions in a trade deal or tit-for-tat protectionism. Third, it could slow momentum for much-needed European economic integration, including capital markets and banking unions, as politicians wait for a crisis that will never come before starting their negotiations.

Finally, voters will see overly pessimistic warnings about inflation and other economic damage as yet another reason not to listen to experts. The consequences of deglobalisation will show up in the slow erosion of long-term productivity and economic well-being. It will leave us all poorer in the long run. That’s less catchy but a crucial defence of why it matters. Overly gloomy warnings of a Trump shock risk weakening crucial support for globalisation and open trade even more.