The UK financial system is vulnerable to a “material hit” as former US President Donald Trump’s aggressive tariff coverage threatens to destabilise international commerce and set off a recent wave of recession fears, based on a stark new forecast by KPMG.
The Large 4 consultancy has downgraded the UK’s progress forecast for 2025 to only 0.8 per cent – almost halving its earlier estimate of 1.7 per cent. Development can also be anticipated to stay subdued into 2026, with the specter of retaliatory tariffs and slowing international demand looming massive over UK exports and funding.
The warning comes amid rising volatility in international markets. Final week, trillions have been wiped from inventory markets world wide as buyers reacted to China’s announcement of a 34 per cent retaliatory tariff on US imports. The FTSE 100 suffered its sharpest every day fall for the reason that early days of the Covid-19 pandemic, whereas Wall Avenue’s S&P 500 recorded its worst weekly efficiency in 5 years.
Oil costs tumbled, sparking heavy sell-offs throughout Center Jap markets – with key indices within the area recording their steepest losses since 2020.
Regardless of the turmoil, US Treasury Secretary Scott Bessent sought to calm nerves, telling NBC: “The market consistently underestimates Donald Trump,” and downplaying the chance of recession. However analysts are more and more unconvinced.
KPMG’s report joins a rising refrain of warnings from economists who say Trump’s proposals – which might increase the common US tariff fee to its highest stage in over a century – pose a critical risk to the UK’s trade-driven restoration.
“Despite the relatively modest 10 per cent tariff on UK exports to the US compared to other partners, the broader impact on global trade could severely undermine UK growth,” KPMG stated. “The UK is expected to see a material hit to its economic performance over the medium term.”
US funding financial institution Goldman Sachs has already revised down its UK progress forecast for the yr to 0.7 per cent, whereas JP Morgan now believes there’s a 60 per cent likelihood the US will enter recession because of the brand new commerce restrictions.
In Brussels, the European Fee is anticipated to unveil plans for retaliatory tariffs on a spread of US items, fuelling fears {that a} full-scale commerce conflict might erupt.
Gary Locke, former US commerce secretary below Barack Obama, informed Instances Radio that Trump’s coverage shift was “absolutely insane”, warning it had “created upheaval in the entire international global trading system”.
The financial fallout has the potential so as to add additional strain on UK public funds, with tax hikes or spending cuts possible within the autumn finances. Chancellor Rachel Reeves was left with simply £9.9 billion of fiscal headroom following the spring assertion – and the Workplace for Price range Duty has warned that an prolonged tariff regime might shave as a lot as 1 per cent off GDP.
“KPMG’s analysis suggests that downgrades to official growth forecasts later this year may force the government to take further action to meet its fiscal rules,” the report famous. “The UK’s limited fiscal space makes this challenge all the more pressing.”
The manufacturing sector, already below pressure earlier than Trump’s newest announcement, might be among the many hardest hit. A brand new index by BDO reveals UK manufacturing facility exercise has dropped to its lowest stage since December 2022. Because the tariffs primarily goal items moderately than companies, producers face an outsized affect.
In the meantime, a snap ballot by the British Chambers of Commerce (BCC) highlights rising anxiousness amongst corporations with robust ties to the US. Of the companies surveyed within the 30 hours following Trump’s announcement, 62 per cent stated they anticipated decrease earnings and income, with one in 5 predicting a major detrimental affect.
Although some exporters stated a ten per cent tariff was higher than anticipated, 42 per cent reported at the very least some disruption. Many are actually planning to boost costs or search new markets.
“This data sets out very clearly the immediate impact of US tariffs and the extent of business concern,” stated Shevaun Haviland, director-general of the BCC. “With retaliatory moves by other countries likely to escalate, the prospect of a global trade war is increasing.”
The reintroduction of protectionist commerce insurance policies provides to current headwinds dealing with UK companies, together with the £25 billion improve in employers’ nationwide insurance coverage contributions that took impact on Sunday.
With worldwide commerce relationships fraying and home pressures mounting, the UK’s financial outlook seems more and more fragile – and policymakers are bracing for a troublesome second half of the yr.
