LONDON – Some investors have expressed optimism about the UK’s economic outlook despite the country’s longstanding structural weaknesses as European Union neighbors deepen trade disputes with the US.
That bright tone wasn’t reflected in the Bank of England’s message as it stabilized interest rates last Thursday, citing indicators of geopolitical uncertainty and financial market volatility. But the UK’s economic growth – the past three years are lukewarm at best – is expected to finally win some in 2025 as Bank of America analysts forecast a 1.4% expansion.
Inflation is expected to approach its target in the coming months. The labour market is slack, but remains strong, and the UK government is sometimes controversial to support growth and reduce the country’s deficit.
Sanjay Raja, British economist at Deutsche Bank, said on his recent client trip to the US, he focused on the “up-and-coming feeling” around the UK that he had not seen for a while.
Key factors include a pivot on deregulation and a focus on more capital expenditures, the possibility of a strong trade deal with the EU next year, and the hope that the UK will “stay in the US.”
US President Donald Trump has expressed his willingness to bolster his forecasts after British Prime Minister Kiel Starmer made a friendly trip to the White House in February to save the UK from blankets or targeted tariffs.
“The talk of the US trade agreement also surfaced in client conversations, and there was growing optimism that the UK could be spared from direct and widespread tariffs,” Raja said.
Some felt that “structural growth could rise after a steady decline since the global financial crisis,” but he continued, but the broad European push to increase defense spending could benefit UK businesses. Raja observed that concerns for investors remained at the sale in January with the sustainability of UK government debt, fiscal directors and spending cuts.
Still taking risks
The UK may have escaped the worst of Trump rhetoric, including the threat of a 200% tariff on EU alcohol imports, but it is completely unimmunized from Washington’s protectionist push.
Gabriella Dickens, G7 economist at AXA Investment Managers, noted that the UK is still facing a hit due to new US tariffs on steel and aluminum. The UK exported a total of 370 million pounds ($479.7 million) of steel to the US in 2024. The UK’s Aluminum Federation said that in total, British aluminum exports to the US were valued at around £225 million last year.
The UK will also be affected by slowing global trade, such as when demand for key partners such as the EU is weak, or when general uncertainty undermines business and consumer confidence.
“In the event that the UK can avoid further tariffs, particularly when trade tensions with the EU are rising, investors’ sentiment could be boosted,” Dickens said. The unlikely event will provide the UK with a “material boost” as manufacturers are likely to consider relocating, she said, following the previous threat of the 25% tariff blanket in the EU.
The UK does not have a large trade surplus with the US, and most of it is service-based, so further tariffs can be avoided. He has already pledged to increase defense spending as a share of GDP, avoiding much of Trump’s rage with other countries.
“Neither of these exempt the UK from tariffs on steel or aluminum,” Dickens added.
Lindsay James, a quilter investor investment strategist, highlighted the existing impact of steel and aluminum obligations on the UK, which flagged potential risks from US tariffs, which are due to be announced in early April.
“The idea that VAT is a kind of tariff seems to be protected by the White House, putting a considerable risk of the UK falling into a cross-sectional US trade policy again,” James told CNBC.
“While the reality is likely to be deliberately misrepresented by the White House to gain the benefits of negotiations, the UK is still unclear, and if Donald Trump’s Ukrainian demands take anything, future trade contracts will likely come at a higher price.”
James said growth has remained a weak trajectory in the short term while the government has improved the UK economy’s foundation in the long term, with higher costs to continue the issue of last year’s budget and the “age sick workforce.”
“While (UK) stock markets have so far benefited from defensive awareness, a modest starting valuation and strong performance from heavily represented sectors such as oil and gas and finance, the divergence from economic performance could lead to a large cap index that continues to outperform domestic stocks,” she said.
