The UK economy is expected to report a rebound on Friday, but the cheer might be short lived. Analysts point to clouds gathering on the horizon, unsurprisingly related to the trade war. While the UK has managed to avoid the brunt US President Donald Trump’s “shock and awe” massive global tariff rollout still poses risks.
Even before the tariff issue, the British economy was facing a tough situation, with higher taxes and a government with little room to spend in a way that would support the economy. The hope was that inflation could come down, allowing the BOE to ease rates through the course of the year. Prior to the tariff turmoil, two rate cuts were expected.
The Evolution of Cable (GBP)
Initially, the pound gained on the back of the tariff announcement, for a couple of reasons. First, the market sell-off caused a precipitous drop in US yields, weakening the dollar. Secondly, Britain escaped the worst of the tariffs, only having to deal with the 10% “baseline”. And thirdly, the UK is still expected to see some growth from increased defense spending in Europe as a result of the US shifting its military priorities towards Asia.
But, those gains were quickly reversed, in part because US yields shot back up. And also, the UK economy remains on shaky ground. There were some clear and public differences of opinion in the government about how to deal with the tariff situation, which caused markets to be unsure how to react. All of this left the pound below the pre-tariff announcement. Britain remains unaffected by Trump’s announced 90-day pause on “reciprocal” tariffs, because it wasn’t targeted in the first place.
Predictions Get Gloomy
Over the last several days, various investment houses cut their forecasts for UK growth this year. (It’s normal to revise the outlook at the start of the quarter.) Deutsche Bank said that the tariff could reduce UK growth this year by 0.3-0.6%. JPMorgan cut its 2025 projections for GDP growth in Britain to 0.6% from 1.1% prior. This was similar to UBS, which now projects just 0.7% growth for the UK economy this year.
However, it could all come down to how the tariff situation is handled. If the UK avoids retaliatory tariffs, then there would be minimal inflationary pressure on the pound. This is different from the US (and other countries which respond with tariffs), where inflation pressure is expected to increase. Less inflation means that the BOE has more room to ease in the coming months to support the economy. However, this will likely weaken the pound as it implies lower interest rates.
What the Data Says
It’s expected to be reported that UK February GDP will come in at 0.1%, reversing the -0.1% from a month before. January’s figure was unexpectedly negative after British manufacturing underperformed. Analysts believe that February UK manufacturing production will be at 0.2% as opposed to -1.1% from January.
The reality is that markets are likely to be still almost blindly focused on tariffs, so it’s possible the data could provide little reaction in the market even if there is a surprise. After all, whether the UK economy manages to grow this year will likely depend on how the tariff situation evolves. But, without clear signs of a booming UK economy that implies higher inflation, the trend for Cable (GBP) could be to the downside for a while.
