Could Britain potentially experience an economic downturn?

Could Britain potentially experience an economic downturn?

Amidst mounting challenges of sluggish growth and persistent inflation, there are indications that the UK economy might slip into a recession in 2025. The International Monetary Fund (IMF) has downgraded its growth forecast for the UK, expecting a slowdown to 1.1% this year, a considerable decline from the 1.6% growth recorded last year.

Despite this downswing, the UK remains the fastest growing G7 nation in Europe, as per the IMF's assessment. Chancellor Rachel Reeves views this development as a testament to the government's efforts to drive long-term growth in the UK. However, this assessment comes against a challenging global economic backdrop, with the IMF lowering its global economic outlook due to escalating trade tensions and an unpredictable environment.

Robert Wood, the chief UK economist at Pantheon Macroeconomics, has expressed concern about the impact of President Trump's recent tariff measures on the global trading environment. These tariffs have reportedly led to substantial revisions in growth projections for the global economy, causing turbulence in financial markets.

Though the UK was placed on a 10% tariff baseline for exports to the US, the interconnected nature of the British economy means that disruptions to global trade could potentially lead to a recession in the UK. Ashley Webb, a UK economist at Capital Economics, has pointed out that the risks of a recession owing to the indirect impact of tariffs are increasingly significant.

With trade barriers being erected, there are fears that global inflation might skyrocket amidst slowing economic growth.However, although a recession could pose challenges for the UK economy, it is not yet a certainty. There are steps that individuals can take to safeguard their assets during such turbulent times.

Economists define a recession as two consecutive quarters of negative economic growth. In the second half of 2023, the UK endured a mild recession, with the economy contracting by 0.1% during Q3 and 0.3% during Q4. The last major recession in the UK occurred during the first half of 2020, brought on by the Covid-19 pandemic and ensuing lockdowns.

As of now, analysts anticipate the UK will manage to avoid a recession this year, albeit narrowly. However, this outlook is subject to frequent revision in light of the imposed tariffs. According to the latest data, the UK economy grew by 0.5% in February, compared to the 0.1% growth predicted by analysts in January. While this growth spurt might precede a challenging period for UK GDP, it could also deter the contraction anticipated in the coming months.

However, there are potential hurdles lurking on the horizon: the new measures from the Autumn Budget, alongside higher minimum wages and increased employers’ National Insurance contributions, pose a threat to growth. In February, the Bank of England revised its growth forecast for the UK economy in 2025 down to 0.75%, from 1.5%. With these challenges in mind, experts are advising investors to adhere to long-term investment principles, recommending diversification, avoiding vulnerable businesses, and resisting the urge to time the market.

Meanwhile, Prime Minister Keir Starmer has pledged to negotiate a trade deal with the US only if it aligns with the nation's interests. Given the consequences of the tariff regimes established by the US, it appears likely that such a deal ranks high on Starmer's agenda.

In the event of a UK recession, investors should consider allocating to defensive assets like gold or government bonds to protect their capital. Gold, currently at record highs, tends to perform exceptionally well during times of heightened uncertainty, minimizing losses during market declines. Similarly, high-quality government bonds offer a relatively low risk of default during economic downturns.

In conclusion, multiple factors - including a slowdown in major economies, inflationary pressures, higher taxes, geopolitical risks, trade disruptions, and cautious consumer spending - raise the possibility of a recession in the UK in 2025. While the chances of a recession are not set in stone, it is essential for the UK government and citizens to remain vigilant and prepared to adapt accordingly.

1. Despite the UK being the fastest growing G7 nation in Europe, economists like Robert Wood and Ashley Webb have expressed concern about the potential impact of President Trump's tariff measures and the interconnected nature of the British economy, suggesting that disruptions to global trade could lead to a recession in the UK.
2. Economists, such as Robert Wood, have highlighted that these tariffs have caused substantial revisions in growth projections for the global economy, causing turbulence in financial markets and increasing the risks of a recession owing to their indirect effects.
3. Government bonds and gold may serve as defensive assets for investors during a potential UK recession in 2025, considering gold's tendency to perform exceptionally well during times of heightened uncertainty and government bonds' relatively low risk of default during economic downturns.
4. In light of the impeding tariffs, autonomous revisions in the UK's growth forecast, geopolitical risks, trade disruptions, higher taxes, and cautious consumer spending, experts are advising investors to adhere to long-term investment principles, recommending diversification, avoiding vulnerable businesses, and resisting the urge to time the market to safeguard their assets during these turbulent times.

Read also: