Despite the UK government announcing three new trade agreements in May, GDP growth outlook remains challenged. These trade deals are likely to offer limited short-term benefits, at a time when several macroeconomic headwinds, including rising inflation, increasing unemployment and constrained fiscal headroom, are weighing on business and consumer confidence.
Against a complex “post-Liberation Day” global trade landscape, the announcement of three new UK trade agreements with the U.S., EU and India is seen as a political win for the UK government. The deals provide some relief for sectors under increasing strain, including automotive, aerospace, agri-food, steel and aluminium. However, are these deals going to be the springboard for the economic growth that the Labour government has promised, or are they simply papering over the cracks? In this paper we investigate the macroeconomic and consumer indicators to answer this question.
The trade agreement with the U.S., announced on 8th May, is expected to soften the impacts of U.S. tariffs; however, the net position the UK will find itself in is still £4.3bn worse-off in GDP terms by 2030 than “pre- Liberation Day.” Furthermore, the UK-EU reset deal, which aims to reduce friction and streamline cross-border trade in key sectors, including agri-food, emissions trading, youth mobility and security cooperation, will only recover c. 7% of Brexit-related losses in GDP by 2040. While the UK’s trade agreement with India, (the third largest after deals with Australia and Japan), represents net-new positive trade, the benefits of this will likely be felt in the longer term as India’s middle-class economy grows into the 2030s and 2040s.
UK GDP growth in Q1 brought some positive news for the government following weak post-election momentum; however, this was primarily driven by delayed investment following the 2024 Autumn Budget and front-loaded activity ahead of U.S. tariffs. In our opinion, the outlook for the remainder of 2025 remains weak due to three key factors:
- Inflation outlook and cost pressures: Inflation grew above expectations in April, driven by labour costs and regulated utility hikes. While this is expected to be temporary, inflation is expected to remain above target levels to 2027, and interest rate cuts are expected to be slow and gradual for the remainder of 2025.
- Labour market: Demand for new hires has continued to fall with unemployment rising to its highest point (4.5%) since Q3 2021, driven by economic uncertainty and rising labour costs.
- Fiscal constraints: Small forecast revisions to the government’s thin fiscal headroom could lead to further tax hikes or spending cuts in the 2025 Autumn Budget.
These challenges are not lost on the UK consumer. Despite real wages rising for almost two years and household net cashflow improving to pre-cost-of-living crisis levels in FY25, consumer confidence is remarkably still falling. This is largely driven by a pessimistic economic outlook, coupled with a poor perception of the government’s handling of the economy. This can be seen in the decisions consumers are making. Saving ratios have reached their highest levels since 2015 (excl. the high-saving COVID-19 period). This is most prevalent among high-income consumers who faced uncertainty following the 2024 Autumn Budget and low-income consumers who remain most concerned about future economic prospects. Simultaneously, households continue to deleverage, with the debt-to-income ratio at its lowest since 2002, and net credit card borrowing falling. The fact that households are using this period to improve their fiscal health suggests that growth and consumer spending should accelerate once confidence begins to recover. However, this rebound may not occur for another 6 to 12 months, which could limit economic buoyancy in 2025.
The implications of the current trade landscape, macroeconomic headwinds and consumer confidence will impact UK industries to varying degrees. Real estate, public sector & defence and agriculture & mining are expected to see growth over the next 12 months, whereas education & healthcare, manufacturing & construction and retail & wholesale are expected to be challenged.
In summary, the UK macroeconomic environment remains challenged, with headwinds, including rising inflation and unemployment and constrained fiscal headroom limiting growth potential in the short term. The three trade deals agreed in May offer limited positive GDP benefit in the short term. Consumer confidence remains low despite underlying consumer economic conditions improving. Until confidence improves, consumer spending will remain suppressed, further harming UK growth and performance.
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