UK Growth Forecast Cut Amid Trump Tariffs and Rising Labour Costs

Britain’s economic growth outlook has been revised downward by the Confederation of British Industry (CBI), citing rising payroll taxes and U.S. tariffs imposed by President Donald Trump. The CBI now expects UK GDP to grow just 1.2% in 2025, down from its previous 1.6% forecast, with 2026 growth lowered to 1.0% from 1.5%.

Key factors behind the downgrade include higher labour costs driven by April’s minimum wage hike and increased social security contributions. These cost pressures are weakening business hiring and investment while contributing to inflation and shrinking profit margins.

Though the UK is the only major economy with a trade deal aimed at exempting it from Trump’s steel and aluminum tariffs, a 10% levy on other goods still applies. The Bank of England estimates that U.S. tariffs could reduce UK output by 0.3% over three years and slightly dampen inflation.

April's economic contraction was also attributed to the end of a tax break on property sales, alongside market uncertainty sparked by Trump’s April 2 tariff announcement. The recent conflict between Israel and Iran has further clouded the global outlook by lifting oil prices.

Despite subdued near-term prospects, the CBI expects consumer spending to drive 2026 growth as inflation eases and borrowing costs decline. The Bank of England is projected to lower rates gradually, with a target of 3.5% by late 2025, down from the current 4.25%.

Inflation is forecast to stay above the BoE’s target through 2025, due to rising household energy costs and regulated utility bills, before easing to 2.5% in 2026.

The CBI noted that Chancellor Rachel Reeves’ recent Spending Review will have limited short-term economic impact, though it may help lift long-term growth potential through targeted investments.