The British economy showed resilience in February, posting a higher-than-expected GDP growth of 0.5%, following a revised stagnation of 0% in January. This welcome new measure comes at a time of increasing alarm from the Bank of England. Both are concerned by upheaval in international capital markets and rising tide of protectionism – particularly from the United States. Since the US is now the UK’s largest trading partner by world region, any change to US tariff policies have major ramifications for the British export sector.
In February, UK GDP beat market forecasts, which had predicted a growth of 0.1%. The robust economic data is a huge relief, given the uncertainties caused by US President Donald Trump’s tariff policies. Recent ongoing international trade disputes have raised concerns about what this could mean for the impact they have on UK exports. The new 10% tariff on UK goods would just add to the difficulties that are already established.
Trade Tensions and Market Reactions
Business financial markets have taken a turn for the worse as heightened US/China trade tensions escalate. The US dollar has been under pressure for some time now, largely reflecting in a spate of weak US economic data, including a softer-than-expected PPI print. The Greenback has been weak against other major currencies. At the same time, EUR/USD has found its footing just above the psychologically important 1.1300 level after retreating from recent multi-year highs over 1.1400.
The Bank of England is watching these developments very closely, as they will have a significant impact on monetary policy meetings. Markets are increasingly pricing in a cut as soon as May. This fueled more speculation that the central bank will need to ease policies further to bolster the economy with such fiscal pressures building. The Bank decided to hold the line on interest rates at its March meeting, with its next meeting due May 8.
Implications for the UK Economy
Taken altogether, the recent GDP figures are an encouraging sign. Bringing in tariffs is a big blow to the UK’s competitive export sector. The introduction of 10% tariffs on UK products would be the opposite, potentially negating any competitive edge that British exports may have in the US market. This can lead to reduced sales and more modest economic expansion for that industry. The situation is further complicated by President Trump’s decision to suspend an additional 10% tariff for 90 days, providing a temporary reprieve but no long-term resolution.
The GBP/USD exchange rate has since retreated from recent peaks around 1.3150. Speculators have been forced to consider how the strength of the domestic economy and the state of our international economic interactions will affect future profitability. The UK is now going through extraordinarily turbulent times. The shape of its economic future will be determined in large part by how trade tensions continue to unfold and how policymakers react.