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LONDON — Investors are beginning to show a more positive outlook regarding the economic prospects of the U.K., even as the nation grapples with persistent structural weaknesses. This growing optimism comes in the context of escalating trade disputes involving other European Union nations and the United States.
However, the stance of the Bank of England remains cautious. Last Thursday, the Bank chose to maintain current interest rates, citing concerns over increased geopolitical tensions and signs of volatility in financial markets. Despite the U.K.’s economic growth being sluggish over the past three years, projections for 2025 suggest a potential uptick, with analysts from Bank of America predicting a growth rate of 1.4%.
Forecasts indicate a gradual easing of inflation towards target rates in the near future. While the labor market shows signs of easing, it continues to maintain a healthy state, and the government is persistently focused—albeit controversially at times—on fostering economic growth and curbing the national deficit.
Sanjay Raja, chief U.K. economist at Deutsche Bank, noted a developing sense of optimism during a recent trip to the U.S. “There seems to be a budding sense of optimism surrounding the U.K. that hasn’t been there for a while,” Raja remarked.
Factors contributing to this optimism include a shift towards deregulation, an emphasis on increased capital spending, the prospect of a favorable trade agreement with the EU in the coming year, and the expectation that the U.K. will maintain a positive trade relationship with the U.S. as tensions rise elsewhere.
U.S. President Donald Trump’s willingness to exempt the U.K. from broad tariffs has further added to this optimism, especially after Prime Minister Keir Starmer’s cordial visit to the White House in February.
“There was a notable discussion about the possibility of a U.S. trade deal among clients, along with an increased belief that the U.K. might avoid significant tariffs,” Raja explained.
Despite these positive developments, challenges remain. The U.K. has managed to sidestep some of Trump’s more extreme tariff threats, like the proposed tariffs on EU-made alcoholic beverages but still faces repercussions from new U.S. tariffs on steel and aluminum imports.
According to Gabriella Dickens, a G7 economist at AXA Investment Managers, the U.K. is adversely affected by the tariffs, having exported steel worth approximately £370 million ($479.7 million) to the U.S. last year, which constituted 9% of the nation’s steel exports by value. Additionally, aluminum exports, valued at around £225 million, have also been impacted.
Global trade slowdowns, particularly affecting key partners like the EU, could further hurt the U.K. economy by dampening demand and undermining business and consumer confidence. Dickens asserted, “Investor sentiment could significantly improve if the U.K. successfully dodges additional tariffs, especially amid increasing trade tensions with the EU.” She pointed out that if the U.S. were to impose blanket tariffs on the EU, it could inadvertently create advantages for U.K. manufacturers who might consider relocating.
Trade Risks Ahead
The potential trade fallout remains a pressing concern for the U.K. It enjoys a limited trade surplus with the U.S., predominantly in services, which may offer it some leeway. The U.K. has committed to increasing its defense spending relative to GDP, which may help avert some criticisms from the U.S. administration aimed at other nations.
However, as Dickens noted, these strategic decisions haven’t insulated the U.K. from the steel and aluminum tariffs. Lindsay James, investment strategist at Quilter Investors, reiterated the significant impact of these tariffs and the potential risks associated with upcoming U.S. tariffs expected to be announced in early April.
“The notion that value-added tax constitutes a tariff seems to have gained traction in the White House, putting the U.K. once again at risk of being targeted by U.S. trade policy,” James commented.
She expressed concerns that while the U.K. government is actively working to enhance economic stability, the immediate outlook for growth remains fragile, with businesses contending with rising costs linked to governmental budgetary adjustments and ongoing challenges stemming from an aging workforce.
“The U.K. stock market has so far benefitted from its defensiveness, alongside strong performances in sectors like oil and gas and finance,” she added. “Nonetheless, the disconnect between stock market performance and overall economic activity could lead to continued outperformance of large-cap stocks over domestic enterprises.”
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