UK Economy Projected to Grow by 1.5% Amid Tariff Concerns
National Institute of Economic and Social Research revises growth forecast while addressing potential impacts of US tariffs.
The UK economy is expected to expand by 1.5% in 2023, according to the National Institute of Economic and Social Research (NIESR), which raised its annual growth prediction from 1.2%.
This revision follows a budget announcement that indicated increased public spending, potentially providing necessary support for economic growth after a series of recent negative economic indicators.
NIESR has expressed caution regarding external factors that could undermine this growth forecast, particularly in light of U.S. President Donald Trump's recent announcements about tariffs.
Specifically, Trump is set to implement a 25% tariff on aluminium and steel imports, beginning on March 12. This will have a direct impact on UK steel manufacturers and raises concerns about the potential for tariffs to extend to additional sectors.
The think tank has noted that if tariffs are imposed on UK businesses, the growth rate could be reduced to 1.3%.
Furthermore, NIESR indicated that the protective measures fostered by the U.S. administration could lead to a depreciation of the British pound, raising import costs and contributing to increased inflation.
A concurrent survey conducted by the British Chambers of Commerce (BCC) highlighted that 63% of manufacturers exporting to the U.S. anticipate repercussions from these tariffs.
A broader polling of UK businesses revealed that 34% are concerned about potential negative impacts due to the evolving trade landscape.
William Bain, head of trade policy at the BCC, described the situation as entering a 'new global era' defined by tariffs, contrasting it with a historically more liberal trade environment.
The unpredictability of the U.S. trade policies, which appear to have both protectionist and geopolitical motives, adds an element of uncertainty to the economic outlook.
NIESR also projected that global economic growth would be hindered by rising inflation rates caused by trade tariffs, estimating a growth rate of 3.2% for both 2023 and 2024, slightly declining to 3.1% in 2026. Specific to the UK, increased prices resulting from U.S. tariffs would compound the effects of heightened government spending, which would limit the Bank of England's ability to decrease interest rates substantially.
The think tank indicated that in an environment of escalating domestic and international inflation, interest rates may need to remain elevated longer than anticipated.
NIESR's outlook suggests that rates will decline to 4.25% only once by 2025, and settle at around 4% thereafter.
This forecast contrasts with market expectations, where investors anticipate two interest rate cuts in 2023.
Earlier this month, the Bank of England reduced interest rates from 4.75% to 4.5% and significantly lowered its growth forecast for the UK in 2025 to 0.75%.
However, NIESR challenges this view by highlighting the potential for increased tax receipts due to government spending of up to £70 billion following Chancellor Rachel Reeves's recent budget proposal.
NIESR posited that per capita economic growth would increase by 1% this year, fueled by above-inflation wage growth projected to elevate real disposable incomes by 1.9%.
Additionally, the Office for Budget Responsibility is set to deliver an initial draft review of public finances to the Treasury.
While sources have suggested a looming small deficit that may necessitate spending cuts, updates to this estimate may emerge by March 26, pending economic conditions.
On Tuesday, Catherine Mann, a member of the Bank of England's monetary policy committee, indicated support for a larger interest rate cut in response to an economic outlook characterized by stagnant wage growth and subdued inflation.
However, Mann acknowledged the uncertainty around future rate changes will become clearer later in the year as the impact of evolving wage trends materializes.
This revision follows a budget announcement that indicated increased public spending, potentially providing necessary support for economic growth after a series of recent negative economic indicators.
NIESR has expressed caution regarding external factors that could undermine this growth forecast, particularly in light of U.S. President Donald Trump's recent announcements about tariffs.
Specifically, Trump is set to implement a 25% tariff on aluminium and steel imports, beginning on March 12. This will have a direct impact on UK steel manufacturers and raises concerns about the potential for tariffs to extend to additional sectors.
The think tank has noted that if tariffs are imposed on UK businesses, the growth rate could be reduced to 1.3%.
Furthermore, NIESR indicated that the protective measures fostered by the U.S. administration could lead to a depreciation of the British pound, raising import costs and contributing to increased inflation.
A concurrent survey conducted by the British Chambers of Commerce (BCC) highlighted that 63% of manufacturers exporting to the U.S. anticipate repercussions from these tariffs.
A broader polling of UK businesses revealed that 34% are concerned about potential negative impacts due to the evolving trade landscape.
William Bain, head of trade policy at the BCC, described the situation as entering a 'new global era' defined by tariffs, contrasting it with a historically more liberal trade environment.
The unpredictability of the U.S. trade policies, which appear to have both protectionist and geopolitical motives, adds an element of uncertainty to the economic outlook.
NIESR also projected that global economic growth would be hindered by rising inflation rates caused by trade tariffs, estimating a growth rate of 3.2% for both 2023 and 2024, slightly declining to 3.1% in 2026. Specific to the UK, increased prices resulting from U.S. tariffs would compound the effects of heightened government spending, which would limit the Bank of England's ability to decrease interest rates substantially.
The think tank indicated that in an environment of escalating domestic and international inflation, interest rates may need to remain elevated longer than anticipated.
NIESR's outlook suggests that rates will decline to 4.25% only once by 2025, and settle at around 4% thereafter.
This forecast contrasts with market expectations, where investors anticipate two interest rate cuts in 2023.
Earlier this month, the Bank of England reduced interest rates from 4.75% to 4.5% and significantly lowered its growth forecast for the UK in 2025 to 0.75%.
However, NIESR challenges this view by highlighting the potential for increased tax receipts due to government spending of up to £70 billion following Chancellor Rachel Reeves's recent budget proposal.
NIESR posited that per capita economic growth would increase by 1% this year, fueled by above-inflation wage growth projected to elevate real disposable incomes by 1.9%.
Additionally, the Office for Budget Responsibility is set to deliver an initial draft review of public finances to the Treasury.
While sources have suggested a looming small deficit that may necessitate spending cuts, updates to this estimate may emerge by March 26, pending economic conditions.
On Tuesday, Catherine Mann, a member of the Bank of England's monetary policy committee, indicated support for a larger interest rate cut in response to an economic outlook characterized by stagnant wage growth and subdued inflation.
However, Mann acknowledged the uncertainty around future rate changes will become clearer later in the year as the impact of evolving wage trends materializes.