US tariffs threaten to derail UK economic growth, EY warns

UK economic growth could slow sharply over the next two years as US tariffs weigh heavy on spending and investment, and uncertainty washes over households and businesses, new forecasts show.

Recovery from a period of stagnant growth will be directly hampered by US President Donald Trump’s plans, EY Item Club said in a new report.

Mr Trump unveiled sweeping changes to US trade policy, introducing a “baseline” 10% tariff on imports from most countries around the world.

About 16% of UK goods exports go to the US, meaning the new tariff rate will directly impact UK growth by squashing demand for products, EY said.

But the bigger hit is set to come from the indirect impact of new policy on a weaker global economic backdrop and spiralling levels of uncertainty.

This is predicted to weigh on consumers who remain in a “cautious mood” following the cost-of-living crisis, and will likely continue putting big spending decisions on hold.

Businesses are also expected to limit the amount they are investing over the next two years as a result.

EY said it was therefore now expecting UK gross domestic product (GDP) to grow by 0.8% this year, down from the 1% growth projected in February.

It also slashed its GDP forecast for 2026 from 1.6% to 0.9% as the longer-term effects filter through to the economy.

Economic growth will then rebound to reach 1.5% in 2027, according to the projections.

The UK is less exposed than other countries but certain sectors such as car manufacturing and pharmaceuticals are particularly “vulnerable”, according to EY’s report.

This is because they trade heavily with the US or, like carmakers, are facing a higher tariff rate on exports.

At the same time, EY said the Bank of England is likely to stick to its gradual approach to cutting interest rates, which are predicted to be reduced to 3.75% by the end of the year, from the current 4.5% level.

Anna Anthony, regional managing partner for EY UK & Ireland, said: “There had been signs that the economy was exceeding expectations in the opening months of 2025, but a combination of global trade disruption, uncertainty, and persistent inflation look likely to postpone the UK’s return to more moderate levels of growth.

“Businesses thrive on certainty, so it’s unsurprising that an unpredictable global market is translating into lower levels of business investment over the short term.

“While conditions remain challenging, there are still some grounds for optimism.

“The services-led UK economy is projected to see continued growth this year and gradual interest rate cuts should slowly bolster business and household spending.

“Over time, the unpredictable global landscape may offer opportunities for the UK to position itself as a stable, attractive destination for investment.”