The UK economy is at risk of a “material hit” as former US President Donald Trump’s aggressive tariff policy threatens to destabilise global trade and trigger a fresh wave of recession fears, according to a stark new forecast by KPMG.
The Big Four consultancy has downgraded the UK’s growth forecast for 2025 to just 0.8 per cent – nearly halving its previous estimate of 1.7 per cent. Growth is also expected to remain subdued into 2026, with the threat of retaliatory tariffs and slowing global demand looming large over UK exports and investment.
The warning comes amid growing volatility in global markets. Last week, trillions were wiped from stock markets around the world as investors reacted to China’s announcement of a 34 per cent retaliatory tariff on US imports. The FTSE 100 suffered its sharpest daily fall since the early days of the Covid-19 pandemic, while Wall Street’s S&P 500 recorded its worst weekly performance in five years.
Oil prices tumbled, sparking heavy sell-offs across Middle Eastern markets – with key indices in the region recording their steepest losses since 2020.
Despite the turmoil, US Treasury Secretary Scott Bessent sought to calm nerves, telling NBC: “The market consistently underestimates Donald Trump,” and downplaying the risk of recession. But analysts are increasingly unconvinced.
KPMG’s report joins a growing chorus of warnings from economists who say Trump’s proposals – which could raise the average US tariff rate to its highest level in over a century – pose a serious threat to the UK’s trade-driven recovery.
“Despite the relatively modest 10 per cent tariff on UK exports to the US compared to other partners, the broader impact on global trade could severely undermine UK growth,” KPMG said. “The UK is expected to see a material hit to its economic performance over the medium term.”
US investment bank Goldman Sachs has already revised down its UK growth forecast for the year to 0.7 per cent, while JP Morgan now believes there is a 60 per cent chance the US will enter recession as a result of the new trade restrictions.
In Brussels, the European Commission is expected to unveil plans for retaliatory tariffs on a range of US goods, fuelling fears that a full-scale trade war could erupt.
Gary Locke, former US commerce secretary under Barack Obama, told Times Radio that Trump’s policy shift was “absolutely insane”, warning it had “created upheaval in the entire international global trading system”.
The economic fallout has the potential to add further pressure on UK public finances, with tax hikes or spending cuts likely in the autumn budget. Chancellor Rachel Reeves was left with just £9.9 billion of fiscal headroom following the spring statement – and the Office for Budget Responsibility has warned that an extended tariff regime could shave as much as 1 per cent off GDP.
“KPMG’s analysis suggests that downgrades to official growth forecasts later this year may force the government to take further action to meet its fiscal rules,” the report noted. “The UK’s limited fiscal space makes this challenge all the more pressing.”
The manufacturing sector, already under strain before Trump’s latest announcement, could be among the hardest hit. A new index by BDO shows UK factory activity has dropped to its lowest level since December 2022. As the tariffs primarily target goods rather than services, manufacturers face an outsized impact.
Meanwhile, a snap poll by the British Chambers of Commerce (BCC) highlights growing anxiety among firms with strong ties to the US. Of the businesses surveyed in the 30 hours following Trump’s announcement, 62 per cent said they expected lower income and profits, with one in five predicting a significant negative impact.
Though some exporters said a 10 per cent tariff was better than anticipated, 42 per cent reported at least some disruption. Many are now planning to raise prices or seek new markets.
“This data sets out very clearly the immediate impact of US tariffs and the extent of business concern,” said Shevaun Haviland, director-general of the BCC. “With retaliatory moves by other countries likely to escalate, the prospect of a global trade war is increasing.”
The reintroduction of protectionist trade policies adds to existing headwinds facing UK businesses, including the £25 billion increase in employers’ national insurance contributions that took effect on Sunday.
With international trade relationships fraying and domestic pressures mounting, the UK’s economic outlook looks increasingly fragile – and policymakers are bracing for a difficult second half of the year.
Jamie Young
Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.
When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.