The week ahead: UK vulnerable to tariffs

Starmer turned on the charm last week when meeting US President Donald Trump. So much so that we might have to go from worrying about the impact of US tariffs on the UK to working out the possible benefits of a US/UK trade deal!

But, before we get carried away, here are some points worth thinking about.

The chances of a UK/US trade deal are still remote given the constraints the UK would face. In fact, any ‘deal’ would be less of a free trade arrangement (so no need to worry about chlorinated chicken) and more like a narrow ‘economic deal’. What that means in reality is up for debate, but it would probably involve aligning tech regulation and enabling more cross border investment – that could be a powerful driver of the UK technology sector. At the very least, it will probably be enough to avoid the UK being subject to direct tariffs.

However, that doesn’t mean we are out of the woods by any stretch of the imagination for two reasons.

First, we still anticipate that the US will eventually enact some sort of universal tariff on all imports. Our working assumption is a 10% tariff. That won’t make a material difference to UK GDP given we only export a relatively small amount of goods to the US, but if a universal tariff turns out to be much bigger then we may have to revise that assumption.

Second, as a medium-sized open economy, the UK is vulnerable to a tariff-induced drop in overseas demand. For example, a 25% tariff on EU goods could knock 1.5% off the regions GDP, according to Bloomberg. (Individual countries, such as Ireland, could be hit much harder). A simple model suggests that would knock 0.1% - 0.2% off UK GDP growth, but the magnitude could be significantly larger if similar tariffs on China, Mexico and Canada depress global GDP growth. What’s more, the disruption in supply chains and global goods flows would weigh heavily on an already beleaguered UK manufacturing sector. A sharp drop in exports knocked 1 percentage point (ppt) off UK growth in the second half of last year alone, and the chances of net-trade being a drag on growth again this year are clearly rising.

We doubt that the difference in tariff treatment between the UK and EU will make much difference for relations between London and Brussels. Both European and British governments are moving closer on defence and security matters. We expect the UK and Europe to gradually become more aligned on economic matters, although any form of customs union is still a long way off.

Ultimately, even if the UK avoids direct tariffs from the US a general increase in tariffs will have a ‘stagflationary’ impact (higher inflation and lower growth) on the developed world that the UK won’t be able to avoid. That’s one of the reasons we have slashed our growth forecast for this year to just 1% - you’ll be able to read more about that in our upcoming Quarterly Economic Outlook.

Mortgage approvals slow

Mortgage approvals probably slipped back slightly in January due to rising borrowing costs prompting lenders to remove their cheapest products. However, we still expect approvals to remain around their 10-year average of 65,000. That level is still consistent with rising house prices.

Mortgages rates remain elevated. Two and five year swap rates, which determine interest rates on mortgages, remain at least triple their 2021 level.

We think roughly 1.2 million homeowners will remortgage in 2025. Those previously on a 2 year fixed-rate should see a slight fall in the interest rate they pay. However, those renewing five year fixed-rate mortgages will see a significant jump in monthly payments.