IMF Cuts UK Growth Forecast Over U.S. Tariffs and Rising Borrowing Costs

The International Monetary Fund has lowered its growth forecast for the UK, now expecting the economy to expand by just 1.1% this year, down from earlier estimates. This downgrade reflects mounting pressures from rising borrowing costs and the ripple effects of U.S. tariffs on trade. Higher government debt expenses and energy inflation add to the challenges, making it harder for growth to pick up.

U.S. tariffs have stirred uncertainty in global trade, disrupting supply chains and weighing on investment and consumption. The IMF’s revised outlook signals a tougher environment ahead, with the UK facing more significant headwinds than some of its European neighbors. This post will unpack the key factors behind the forecast cut and consider what it means for Britain’s economy moving forward.

IMF's Revised UK Growth Projections for 2025 and 2026

The International Monetary Fund (IMF) has updated its outlook for the UK economy, reflecting rising challenges from external trade tensions and internal pressures like higher borrowing costs. These new projections show more subdued growth expectations compared with earlier forecasts. Understanding these revisions offers clarity on what’s ahead for the UK in the coming years.

Details of the Growth Forecast Reduction

The IMF has trimmed the UK’s growth forecast for 2025 to 1.1%, which is a drop of 0.5 percentage points compared to its earlier prediction of 1.6%. For 2026, the growth projection is slightly raised to 1.4%, still below previous estimates but showing a mild improvement.

Several factors influenced this downward revision:

• Economic carry-over effects: Weakening momentum from previous years slows expansion.
• Trade shocks: U.S. tariffs, including a baseline 10% levy on UK goods plus higher rates on steel, aluminum, and vehicles, significantly impact UK exports, especially in the automotive sector.
• Rising borrowing costs: Elevated government debt expenses reduce fiscal flexibility.
• Inflation pressures: Energy and utility costs remain high, pushing inflation to an estimated 3.1% in 2025, well above the Bank of England’s target.

The UK's heavy reliance on trade—its trade-to-GDP ratio is around 65%—makes it particularly vulnerable to global supply chain disruptions. These combined effects explain why growth is now expected to lag behind initial forecasts.

Photo by Karolina Grabowska

Comparative Analysis with Other Economies

Putting the UK’s forecast in context shows how it compares with other economic powers and reveals its relative weaknesses amid these challenges.

• United States: The IMF lowered the U.S. growth forecast to about 1.8% in 2025, reflecting trade tensions and recession risks.
• Eurozone: Growth forecasts hover in a slightly better range, with economies like Germany projected to recover more steadily despite tariff impacts.
• Canada: Faces similar trade challenges but with a more diversified economy that somewhat cushions the blow.
• Other G7 nations: Most are expected to grow faster than the UK in 2025–26, benefiting from stronger domestic demand and less exposure to tariffs.

The UK's specific vulnerabilities stem from its trade exposure and inflation pressures. Unlike some European neighbors, the UK's manufacturing and export sectors are more exposed to the U.S. tariff impacts. Meanwhile, elevated borrowing costs and tighter fiscal conditions accentuate risks. This combination poses a greater drag on growth, compared with peers who might face challenges but have more policy leeway or lower trade sensitivities.

The IMF’s assessment clearly positions the UK as prone to slower growth relative to major economies, shaped by both external shocks and internal financial strain. This comparative angle highlights the uphill path the UK faces in regaining solid economic momentum as global uncertainty persists.

For further insights on the economic impact of trade policies, the IMF's official country reports provide detailed context on these forecasts.

Explore the IMF’s UK Country Overview for more detailed information.

How U.S. Tariffs Weigh on the UK Economy

Recent actions by the U.S. administration have introduced a new challenge for the UK economy. Tariffs that raise the costs of British products entering American markets now chip away at the UK's trade strengths. These tariffs, combined with a wider environment of trade uncertainty, create significant obstacles that squeeze growth prospects. Let’s break down exactly what this means and how it affects UK businesses and exports.

Tariff Increases and Trade Uncertainty

The U.S. has enacted new tariffs that increase the cost of UK exports, pushing effective tariffs to around 7% on a broad range of goods. This includes:

• A baseline 10% tariff on most UK goods, which adds a direct cost to exports.
• Higher tariffs on specific items like steel, aluminium, and vehicles, hitting key UK industries hard.

This trade tension is part of a broader pattern where protectionist policies have unsettled global markets. For businesses, this isn’t just about paying more tariffs — it’s about facing unpredictable rules, delays, and added paperwork.

Trade uncertainty is like fog on a busy road: it slows everything down, making companies hesitant to invest or expand amid unclear future costs. The ongoing back-and-forth of tariffs, coupled with the threat of new measures, creates a challenging atmosphere for exporters and investors alike.

Photo by Markus Winkler

Consequences for UK Exports and Business Investment

When tariffs push up prices on exported goods, UK companies face two main problems:

1. Reduced competitiveness in the U.S. market: American buyers may turn to cheaper alternatives from other countries or domestic producers. UK exports become less appealing when products cost more due to tariffs.
2. Dampened private investment: Companies hesitate to invest in new equipment, jobs, or expansions when trade rules and costs are uncertain. Uncertainty acts like a brake on business confidence.

Together, these effects chip away at growth. UK exporters lose some ground in a market that accounts for a significant slice of their sales. At the same time, potential investment slows down, removing a key engine of economic expansion.

Several sectors feel this impact more deeply:

• Automotive industry: Vehicles and parts face some of the heaviest tariffs, directly reducing export volumes.
• Metal industries: Steel and aluminium exporters face extra levies, pushing up costs and hampering trade.
• Manufacturing and machinery: Often caught in tariff crossfires, these sectors face higher barriers to entering the U.S. market.

With trade so crucial to the UK—the trade-to-GDP ratio hovers near 65%—these added costs ripple across the economy, ultimately reducing the pace of growth.

The UK Parliament’s House of Commons Library provides a thorough briefing on these tariffs and their broader impact. Their analysis highlights that the tariffs' consequences extend beyond immediate costs, influencing market confidence and investment decisions.

For more detailed insights on tariff effects and trade policy analysis, see US trade tariffs - House of Commons Library.

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This combination of rising tariffs and unsettled trade relations clearly explains why the IMF sees a weaker growth outlook for the UK. Higher costs, reduced demand, and delayed investment all create a drag that is hard to overcome in the short term.