UK growth forecast slashed

[EUROPE] The UK's economic growth forecast for 2025 has been sharply downgraded, with multiple institutions citing the dual impact of escalating global trade tensions and domestic cost pressures. The Organisation for Economic Co-operation and Development (OECD) has revised its UK growth projection down to 1.4%, a decrease from the previous 1.7% forecast. Similarly, the Bank of England has halved its growth estimate to 0.75%, reflecting concerns over global risks and weakening business confidence.

Trade Tensions and Global Economic Uncertainty

Central to these revisions are the recent imposition of significant tariffs by the United States under President Donald Trump's administration. The US has enacted a 25% tariff on steel and aluminium imports and a 20% tariff on Chinese goods, measures that have disrupted global trade flows. The OECD warns that such protectionist policies are likely to dampen global economic activity, increase trade costs, and reduce consumer purchasing power.

HSBC has also expressed concerns, noting a 25% drop in its quarterly profits, attributing the decline to geopolitical tensions and increased trade tariffs. The bank has raised its provisions for bad debts to $900 million, indicating potential financial strain across markets.

Domestic Challenges: Tax Increases and Business Investment

On the domestic front, businesses are grappling with rising operational costs. The British Chambers of Commerce (BCC) highlights the "double whammy" effect of increased national insurance contributions and the minimum wage, which are squeezing profit margins and hindering investment. Consequently, the BCC has downgraded its 2025 business investment forecast from 0.9% to 0.6%.

The service sector is also showing signs of strain, with employment in the sector declining at its fastest pace since the pandemic, according to the S&P Composite Purchasing Managers’ Index. This downturn reflects broader concerns about the economic outlook and the challenges businesses face in navigating both domestic and international pressures.

Outlook and Policy Responses

Despite these challenges, some analysts suggest that the UK's service-oriented economy may offer resilience. Investor Alex Wright of Fidelity International notes that the UK is "strikingly well placed" to withstand global tariff disruptions due to its limited export base and service-driven economy. He points to investments in defensive sectors such as consumer staples and utilities as indicators of the market's resilience.

In response to the economic slowdown, the Bank of England has implemented a quarter-point interest rate cut, bringing the rate to 4.5%. This move aims to ease borrowing costs and stimulate economic activity, though the central bank remains cautious about further rate reductions amid ongoing global uncertainties.

The UK's economic landscape in 2025 is characterized by a confluence of global trade tensions and domestic cost challenges. While certain sectors may demonstrate resilience, the overall outlook remains cautious. Policymakers will need to navigate these complexities carefully to foster a stable and growing economy.