UK QUARTERLY ECONOMIC OUTLOOK | Q2 2025
The UK vs Global economy
US growth to slump – still a good chance of stateside recession
US tariffs, and other countries’ responses to them, mean that global economic growth will slow this year. The biggest impact of US tariffs on goods imports from the rest of the world will be on the US itself. After significantly outperforming other developed economies for the last five years, US growth is set to slow sharply this year as inflation accelerates again.
We have already seen the first impacts of the tariffs Donald Trump imposed on the US’s trading partners in April, with Q1 GDP growth in the US immediately slumping to -0.2%. Now that the worst of the tariffs have been rolled back, or at least paused for 90 days, growth may pick up again in Q2, but growth over the whole of this year is likely to come in closer to 1% for the US than last year’s 2.8%.
What’s more, after slowing at the end of last year, inflation is likely to re-accelerate as tariff-induced price hikes come into effect. That will leave the Federal Reserve (Fed) in a position that the European Central Bank (ECB) and Bank of England (BoE) are more used to being in; namely, an environment of weak growth and high inflation. It makes it unlikely the Fed will be able to cut interest rates until later this year, if at all.
In Europe, tariffs will also weigh on growth, but a huge increase in defence and infrastructure spending over the next decade will help to offset that. While this will probably not come soon enough to impact growth this year, the proposed fiscal measures could add 0.5ppts to eurozone GDP next year.
Trade uncertainty and rising inflation have meant the Fed has already signalled it’s in no rush to cut rates as it contemplates the effect of potential tariffs on inflation. Yet, the recent deterioration in growth means financial markets are still expecting rate cuts. Meanwhile, we expect the ECB and BoE to continue to cut rates gradually to support a weaker growth environment in Europe.
The big uncertainty is obviously around US tariff policy. The recent threats to impose a 50% tariff on imports from the EU, which has already been paused, show that potential disruptions to trade flows are far from over. Ultimately, though, the global economy is entering a period of relatively higher inflation and interest rates compared to the pre-pandemic era, which will continue to put pressure on government budgets as global economic growth remains subdued.
