The country faces a number of macroeconomic risks, but equities remain attractively priced.
An unprecedented wave of tariffs has sent shockwaves through global markets. As rhetoric turns into action, blanket tariffs on US trading partners have rattled investor confidence, with the UK also feeling the impact.
The UK economy could face significant challenges if the US imposes high tariffs as part of its broader trade strategy, according to latest analysis by the National Institute of Economic and Social Research (NIESR).
Imposition of a 10 per cent universal tariff and 60 per cent tariffs on China could reduce global economic output by 2 per cent over five years, according to the NIESR forecasts.
While the UK is not the foremost target of the US measures — its 10 per cent tariff on exports to the US is a lighter barrier than those imposed on other trading partners — it is vulnerable to ripple effects, which would raise prices and dampen economic activity.
In a worst-case scenario, NIESR predicts UK GDP growth could come to a standstill in 2026. The analysis highlights the potential for widespread global disruptions, with supply chains likely to be severely affected, undermining economic stability far beyond the directly impacted nations.
This comes on top of other challenges to the UK. The sale of non-travel branches of iconic newsagent WH Smith to Modella Capital, a private equity fund, which will rename them TG Jones, is seen as a final nail in the coffin of the UK high street. Meanwhile decisions taken by chancellor Rachel Reeves have made some investors even more sceptical of the UK as an investment destination.
Eroding advantages
“The UK needs to devise a new growth model,” argues Arnab Das, global macro strategist at Invesco, especially as its traditional role as financial intermediary through the City of London is being eroded.
“The UK also needs to consider a new geopolitical and geoeconomic strategy, now that the US is adopting a more unilateral foreign policy and an inward-focused economic approach, prioritising onshoring production and investing in tangible capacity rather than technology, finance, and construction,” he adds.
Cultivating a more dynamic business and entrepreneurial environment is also a priority, stresses Mr Das. “A more dynamic business, investment, and entrepreneurial environment is what’s needed to boost trend growth and capitalise on the UK’s innate strengths,” he says.
Mr Das further critiques the current Labour approach, arguing it exacerbates the UK's economic challenges. “Labour has failed to break this cycle,” he argues, “and worsened it with tax hikes on labour and capital investment.”
To reverse these trends, Mr Das advocates deregulation, tax cuts, and creating an environment conducive to innovation and research, adding that “self-starters, entrepreneurs, and the wealthy… should be encouraged to stay”, rather than leaving for more favourable markets. However, he remains sceptical that Labour will take the necessary steps, noting their strategy is “cautious and tinkering at the margins with little payoff in the near future”.
Back on the road again
Some commentators, however, highlight the significant geopolitical advantages of the UK. "The UK's historical advantage has always been its proximity to Europe, combined with strong ties to the US. If we can get these relationships right, there’s every reason the UK can get back on the right trajectory,” says Tom Morris-Brown, portfolio specialist at Impax Environmental Markets.
The broad outlook for the UK equity market remains promising, argues Nina Stanojevic, senior investment specialist at St. James’s Place.
“The UK equity market remains deeply undervalued, with stocks trading around the 25th percentile of their historical range and at a 40 per cent discount to global equities,” she argues, presenting a potential opportunity for mean reversion and valuation recovery.
While there are concerns about domestic retail and economic uncertainty, Ms Stanojevic points out that UK-listed companies are highly globalised, with 75-80 per cent of revenues coming from outside the country, particularly from the US and Asia. This, she adds, makes them less dependent on domestic conditions.
Furthermore, the UK market offers “one of the highest dividend yields among developed markets”, which is appealing to income-focused investors. She highlights the recent surge in corporate activity, such as share buybacks and M&A activity, as a positive sign of investor confidence.
However, Ms Stanojevic also acknowledges risks, including trade barriers and ongoing regulatory reforms. “While macroeconomic risks persist, the combination of low valuations, high dividends, and global revenue exposure suggests the UK market still offers compelling opportunities rather than being doomed,” she says.
Avoiding impulse adjustments
Despite heightened market uncertainty surrounding president Donald Trump's tariff announcement, which has sparked concerns about potential disruptions to global trade, Ms Stanojevic cautions investors against reacting impulsively to the news. “It’s crucial that investors remain disciplined and avoid making any impulsive portfolio adjustments in response to short-term turbulence.”
Analysts at Capital Economics indicate that higher tariffs will likely reduce US demand for UK exports, create downward pressure on GDP, and add further uncertainty to an already volatile economic environment.
However, they also stress the UK is less vulnerable than other economies, and any direct impact on UK GDP from tariffs is expected to be modest. They also highlight the complex nature of the tariff impact, with factors such as inflation and exchange rate movements further complicating the picture. While it is too early to revise UK GDP forecasts based on tariff news, Capital Economics anticipates growth will remain below consensus estimates in coming years, primarily due to ongoing uncertainty and trade tensions.
