Unexpected economic growth in February is positive news for UK policy-makers. But the latest GDP data release pre-dates the imposition of tariffs on goods exports to the United States. How these protectionist measures will affect the UK economy remains to be seen.
The UK economy grew by 0.5% in February 2025 compared to the previous month (Office for National Statistics, ONS, 2025). This was driven by a month-on-month rise in services growth – from 0.1% to 0.3% – along with recoveries in construction and production (which increased by 0.4% and 1.5%, respectively).
On a quarterly basis, GDP growth has improved, accelerating from 0.3% in January to 0.6% in February. This was driven primarily by a stronger performance in services and a positive contribution from production – the first increase for the sector since May 2024 (see Figure 1).
Figure 1. Contributions to quarterly real GDP growth
Source: ONS, author’s calculations
But this uptick may be short-lived. Despite signs of recovery up to February, the country’s GDP outlook for the second quarter could soon shift again, as the new programme of tariffs on goods exports to the United States comes into effect. This is especially the case for the production sector, which accounts for 97% of total UK goods exports.
Several of the Trump administration’s new measures could have a direct effect on UK output. For example, the US government has imposed 25% tariffs on aluminium, steel, and passenger vehicles and trucks, which together represent about 18% of total UK production. In addition, the 10% tariff on all goods imports into America is expected to affect 67% of total UK production. Some industries, including pharmaceuticals, semiconductors and timber, have – at least for now – been exempted from tariffs. This sub-group accounts for about 15% of total UK production.
Around 20% of UK production relies on international demand. Roughly half of this is from countries in the European Union (EU), with the remaining share coming from the rest of the world. The United States constitutes one fifth of total UK exports and over a third of exports to non-EU countries.
The impact of the tariffs will vary across different production sub-sectors, depending on their reliance on US demand. Industries facing 25% tariffs are likely to be the most affected, as 30% of their demand originates from non-EU countries (including the United States). Conversely, industries subject to the baseline 10% rate may be less vulnerable, as only 8% of their total demand comes from outside the EU.
Industries exempt from tariffs depend on non-EU countries for approximately 11% of their orders (see Figure 2). This exemption is crucial for pharmaceutical firms, as the United States is the largest market for the sector. For example, over half of GSK’s sales and 40% of AstraZeneca’s are to the United States. For these two companies, American demand is critical.
Figure 2. UK production categorised by the level of US tariffs and by destination.
Source: ONS, author’s calculations. Note: Figures were calculated using the ONS Supply-Use Table 2022. Domestic demand encompasses both intermediate and final consumption
It will be crucial for policy-makers to monitor the evolution of production in the coming months, especially in the sub-sectors affected most acutely by US tariffs. This will help the UK to assess the extent of the impact of American protectionism on production, as well as the wider economy.
The direct effects of the tariffs on UK GDP may start to materialise in the March data (as firms anticipated the protectionist measures) and they are likely to become clearer once the April growth figures are released. In addition, an indirect negative effect stemming from reduced global demand may become evident in the second quarter of 2025 and beyond.
Unlike the delayed direct impact of tariffs on UK GDP growth, trade tensions have already had an immediate adverse effect on UK financial markets. The FTSE 100 index fell by over 8% in the first ten days of April. This tumble in asset prices could dampen investment and harm consumer confidence, acting as a drag on the country’s GDP growth prospects.
While the unexpected GDP growth in February is positive news, these figures do not yet account for the announcement and implementation of new US tariffs and the subsequent economic turmoil. The extent to which actions in Washington affect growth here in the UK remains to be seen, but it looks likely that there are challenging times ahead.
WHERE CAN I FIND OUT MORE?
Trump's global tariffs announced on 2 April 2025 could have a significant impact on economic growth in the UK and they are already reshaping the country's trade policy.
- The Telegraph has identified which UK industries are likely to be the most affected: Aston Martins to Scotch: The UK industries hit hardest by Donald Trump’s tariffs.
- The Financial Times (FT) has analysed how these tariffs will influence UK economic growth: UK growth forecasts hit by Trump’s tariffs.
- In an interview in the FT, the chancellor Rachel Reeves suggests that the ‘trade war makes improved UK-EU relations imperative’.
Find out more about economic growth from the Economics Observatory:
- Vince Cable and John Turner explore which policies can best support private sector growth in the UK.
- Can universal basic infrastructure support growth across the UK? Diane Coyle, Stella Erker and Andy Westwood explain how UBI can help to reduce local and regional inequalities and ensure that all places prosper.
- Ed Cornforth analyses which taxes are best and worst for growth.
