UK 'relatively well placed' to weather tariff shock, says Berenberg

8th Apr 2025 09:38

(Sharecast News) - Berenberg said on Tuesday that the UK was "relatively well placed to weather the tariff shock".

In a research note, the bank said: "The UK has not been short of policies that damage the economy over the past decade. But the US administration's assault on foreign trade will overshadow the UK's missteps. If Donald Trump's trade war and the equity market sell-off trigger a global recession, the UK would of course struggle.

"However, the UK is relatively well placed to weather the tariff shock."

Berenberg noted that the additional 10% rate it faces is at the bottom end of the range imposed by the US. It said that healthy consumer finances, lower energy prices and a fall in interest-rate expectations will also help.

"Despite this, UK equity prices have fallen by as much as their European counterparts in the year to date," it said.

Berenberg pointed out that UK goods exports to the US account for less than 2% of GDP - most of which are exports - compared to 3.2% for the eurozone.

"The share of UK value added embodied in US demand is well below 1% of GDP," it said, adding that UK government calculations imply that the 10% tariff will directly reduce GDP by less than 0.1%.

Berenberg argued that the UK could even stand to make a gain.

"Some UK producers may gain US market share from worse-hit competitors, and international companies could relocate operations to the UK to avoid higher charges," said senior UK economist Andrew Wishart.

"Admittedly, the spillover from slower growth in economies worse affected by US tariffs will ensure that, in absolute terms, UK growth is weaker than it otherwise would have been."

Wishart said he expects many of the newly-announced Trump tariffs "to be negotiated away" in the next three months. That would contain the global damage.

"Nonetheless, we cannot rule out a worst-case scenario of a global recession, in which tariff uncertainty freezes corporate investment decisions and consumer confidence collapses following the plunge in equity prices," Wishart said.

"On top of limited trade exposure, we see three further reasons for the UK to outperform during the adjustment to US tariffs: i) UK consumers are already very cautious, saving the highest proportion of their income since 2010 (outside of the Covid-19 lockdowns) in Q4 2024.

"It seems unlikely that UK households will further increase savings from this level. ii) If sustained, the fall in energy prices (in sterling terms, gas prices are down by 6% mom and oil by 8%) will support households' real incomes and make it slightly easier for the Bank of England to lower interest rates. iii) UK households have low exposure to equities (less than 5% of household wealth) but a significant amount to housing (40%)."

He said that in the near term, falls in interest-rate expectations will pass through to a decline in mortgage rates that supports buyer demand and house prices.

Wishart said that instead of recognising the UK's resilience to this shock, commentators have focused on the implications for fiscal policy. This is not fully justified, he said.

"UK public finances have indeed gone through a structural deterioration since 2019 that the government needs to address. But so have most other countries'. The UK is not an outlier. Its debt-to-GDP ratio remains below that of France and the US. If we are right to think that President Trump's trade and migration policies will reduce US trend growth, investors will become increasingly worried by large US fiscal deficits.

"By contrast, the UK government must close the deficit to remain within its fiscal rule. While unpopular and inefficient, the increase in payroll tax announced in the budget will begin the process of consolidation."

Wishart also highlighted the country's "stable, pragmatic" government.

He said that while the Brexit referendum and Liz Truss's 'mini budget' hurt the UK's reputation among global investors, leading them to discount UK assets, if the UK delivers the planned reduction in the fiscal deficit, it would begin to look like a relatively safe investment.

"The government's large parliamentary majority, a fiscal rule that it can use to keep departments and ministers under control, and the likelihood that welfare savings will be larger than most anticipate, mean that it should succeed," Wishart said.

"Alongside reform of the planning system and stable corporate tax rates with generous capital investment allowances, that would begin to improve the UK's reputation as a place to invest."