Trump’s tariffs and soaring wage costs ensure rocky year for UK economy

Households and businesses have endured a bumpy ride over 2025 as the impact of tax hikes and US President Donald Trump’s trade war weighed on the economy, but another slew of interest rate cuts helped cushion the blow.

Chancellor Rachel Reeves dealt a hammer blow for businesses in April, with the increase in national insurance contributions coinciding with a significant rise in the minimum wage. Warnings that the tax hike would lead to price rises in shops and job cuts appeared to be borne out, as the increasing cost of food saw inflation ratchet up to an annual peak of 3.8% in the summer. As retailers grappled with the double whammy hit to their wage bills, many responded by passing on some of the costs to consumers through price rises. For food retailers, this also coincided with soaring costs for a range of staples, such as meat and beef in particular, coffee and chocolate, as well as a new packaging tax. This sent food and drink inflation back up to 4.9% by October, having been firmly on a downward path in the previous year. As Karen Betts, chief executive of the Food and Drink Federation, said earlier this year: “Food and drink manufacturers are paying nearly 40% more for ingredients and energy than they were in January 2020, as well as bearing a range of newer regulatory costs, like new packaging taxes and increases to employer national insurance. “Hard-pressed food and drink companies are finding they simply have no choice but to increase prices.” But despite the pressure on inflation, easing wage growth helped the Bank of England deliver some much needed cheer in the form of four rate cuts since the start of the year. A final pre-Christmas reduction in December saw the base rate come down from 4.75% at the start of 2025 to 3.75% by the year end. While good news for over a million mortgage borrowers, it was also a sign of some of the weaknesses in the UK economy – in particular the jobs market. Rising prices was not the only impact of the wage bill pressures for businesses, as many firms cut jobs in response. Britain’s rate of unemployment rose to 5.1% in the three months to October as many of the fears over the impact of rising labour costs came to pass. The rate was the highest for more than four-and-a-half years, but outside the Covid era, it was the highest for nearly a decade. As well as rising wage costs, the unstoppable rise of artificial intelligence (AI) was also increasingly cited as a factor in company decisions worldwide to trim their workforces. Amazon’s announcement in October that around 14,000 corporate jobs worldwide were facing the chop was directly blamed on AI as the online retail titan said it was switching resources to invest more in the new technology. It was a further sign of the shake-up being cause in labour markets across the globe. Another seismic shift in the global economic landscape came in the form of the trade war waged by Mr Trump. Soon after taking office for his second term in January, Mr Trump came out fighting with plans for his “liberation day” tariffs in April. It sent shockwaves through most major economies, with the UK no exception. Manufacturing and car sectors were among the hardest hit, with the likes of Aston Martin Lagonda warning over a significant profit impact from new tariffs on UK car imports. As the US imposed a 10% blanket tariff on most UK goods entering the world’s biggest economy, economic growth slowed sharply in April, amid a record drop in exports to America. While leading to a slew of downgrades for UK output, many of the subsequent trade deals struck with the US helped the economy weather the storm and initial gloomy forecasts for gross domestic product (GDP) in the year were eventually revised higher. In November, the UK’s independent watchdog, the Office for Budget Responsibility upgraded its growth outlook to 1.5% from its previous prediction of a paltry 1%. However, the uncertainty and rampant speculation over tax hikes ahead of the November 26 Budget held back growth in the fourth quarter of the year – with the Bank predicting the economy would flatline in the final three months. While the much-feared income tax rise did not happen, there was little to spur on growth in the Budget, which disappointed many businesses. Matt Swannell, chief economic adviser to the EY Item Club, warned “another year of sluggish growth for the UK economy is expected in 2026”. He said the private sector outlook remains “weak”, with consumers also under pressure as 2025’s rate cuts will not shield those coming off cheap fixed rate deals. But Elliott Jordan-Doak at Pantheon Macroeconomics said he believes the economic gloom will slowly lift in 2026. “The improvement in consumers’ confidence – likely off the back of the Chancellor shelving an income tax hike – bodes well for consumer spending. “GDP growth should accelerate in the first quarter, with the Budget now in the rear-view mirror.”

Published: 30/12/2025 by Radio NewsHub