Economic update: Trade tariffs lower growth forecasts

When the Chancellor presented her Spring Statement to Parliament on 26 March 2025, the UK’s economic context was already somewhat uncertain. The scale of what could happen became very clear a little over a week later, when sweeping tariffs were imposed on almost all goods imports into the United States.

This Insight looks at recent economic data in the UK, and examines the position both before and after the new US tariff regime was brought in.

Positive economic signs in the data from before April

Recent data shows that there were some positive signs starting to appear in the economy before April. The economy was 0.6% larger in the three months to February 2025 than it had been in the previous three months, with most of this increase being driven by the services sector, as shown in the chart below.

The increase in February was larger than economists had predicted (although monthly data is often revised later). Similarly, inflation in March 2025 was 2.6%, which was lower than the 2.7% that the Bank of England had forecast in February. The Bank of England expects inflation to rise to 3.6% in April with the increases to various household bills.

Not all the economic news was positive. Payrolled employment fell slightly in February and provisional estimates suggest that it fell further in March. The Financial Times quotes an economist as saying that this may be linked to the introduction of higher employment National Insurance Contributions (NICs), as announced last autumn. Service sector businesses surveyed as part of the S&P Global Purchasing Managers’ Index reported that the number of people on their payrolls had decreased since October (PDF).

Public sector borrowing was also higher than expected. Figures published on 23 April showed that public sector borrowing in 2024/25 was provisionally estimated at £151.9 billion, nearly £15 billion more than the Office for Budget Responsibility’s (OBR) most recent forecast in March.

Tariffs result in a more negative outlook

The Trump administration’s introduction of tariffs on almost all goods imports into the United States – and the subsequent increases, changes and suspensions of those tariffs – have had a significant effect on economic forecasts.

International organisations have lowered their forecasts

In its latest trade forecasts on 16 April 2025, the World Trade Organization (WTO) downgraded its projections of both global trade and economic growth. Having previously predicted growth in global trade volumes of 2.7% in 2025, its new forecast lowered this to a decrease of 0.2%. Although this change was largely driven by a decrease in trade in North America, forecasts were also downgraded for South America, Europe and Asia. The WTO’s global gross domestic product (GDP) growth forecast for 2025 was lowered from 2.8% to 2.2%.

The International Monetary Fund (IMF) has also lowered its expectations of economic growth. In its April 2025 World Economic Outlook, the IMF roughly halved its forecast for growth in global trade volumes in 2025, from 3.4% in its October 2024 forecast to 1.7%. As the charts below show, it also lowered its GDP growth forecasts for the world as a whole, for the G7 economies, and for the UK specifically.

The IMF forecast for the UK in 2025 had previously been more optimistic than that of the UK’s Office for Budget Responsibility (OBR). This reduction brought the IMF more in line with the OBR’s expectations. As of March 2025, the OBR expects GDP growth of 1.0% in 2025, slightly below the IMF’s new forecast of 1.1%, but its forecasts are higher than those of the IMF in later years.

UK data shows a loss of confidence

Some forward-looking data from the UK also suggests there may be trouble ahead for the economy. Business activity as measured by the S&P Global Purchasing Managers’ Index (PMI) fell for both services providers and manufacturers in the flash estimate for April (PDF). Businesses reported concern about the effect of tariffs, particularly on export orders, and optimism about the next 12 months fell to its lowest level since October 2022.

The effects of tariffs on the UK economy are likely to be complex. As reported in the Guardian, industry leaders from the automotive, manufacturing and energy sectors told Parliament’s Business and Trade Committee on 22 April 2025 that job losses were likely without further action. The effect on the UK’s steel industry has also been negative. Introducing emergency legislation to take control of the British Steel plant at Scunthorpe on 12 April 2025, the Business Secretary said that the US’s tariffs are “not welcome”, although he also said that the issues with British Steel “are about more than the imposition of tariffs”.

The disruption to trade and to the economy may also affect interest rates. Bank of England policymakers have noted the uncertainty of how tariffs could affect UK inflation and thus future interest rate decisions. The IMF now expects there to be three further interest rate cuts in 2025, in line with financial market expectations at the end of April.

The government has taken some specific actions to limit the effect of tariffs, in addition to working on a trade deal with the United States. In particular, on 13 April 2025 it temporarily suspended its own tariffs on 89 products to reduce costs for businesses.

About the author: Philip Brien Senior researcher at the House of Commons Library, specialising in public spending.