Could Trump’s tariffs compound the threat of recession or stagflation in the UK? 

After several days of economic turmoil last week, the global markets returned to stability once US President Donald Trump announced a 90-day pause for most countries facing tariffs above 10%.  However, with China excluded from this reprieve, the tit-for-tat tariff battle between the two global superpowers showed little sign of abating – as it stands, US tariffs on Chinese imported goods total 145%, while Chinese tariffs on American goods total 125%.  For now, the UK is off the list of Trump’s most punishing tariffs, with the expectation it’s unlikely to negotiate a deal below the 10% baseline tariff.

Encouragingly, the latest Office for National Statistics (ONS) figures for February⁽¹⁾ showed higher than anticipated economic growth, with a 0.5% increase in gross domestic product (GDP) that included growth in construction. But although the UK may currently remain insulated from any direct impact of global tariff wars, it’s by no means immune to what continues to play out on the economic world stage. Neither, indeed, is construction, which could buckle under the strain of further pressures – according to The Insolvency Service it continues to be the sector experiencing the highest number of insolvencies. Here, we outline the potential impacts on the economy and the industry, and what the UK government could do to mitigate these.

Recession versus stagflation

Recession is defined as two consecutive quarters of negative GDP growth, i.e. where GDP shrinks. It reflects broad economic contraction – declining business investment, falling consumer confidence and rising unemployment. With the UK avoiding recession in the last two quarters of 2024, it appears unlikely the country is heading into one.

However, stagflation remains a much more distinct possibility and, unfortunately, it presents far more complex challenges. Its key features are:

• Stagnant GDP growth (hovering around zero)
• High inflation, which erodes the value of money
• Spiralling wage growth (which feeds ever higher inflation)

There are some positive signs for the construction sector. The latest monthly figures from ONS estimate that output grew by 0.4% in February this year, offsetting a 0.3% decline in January; driven by increases in both new work (0.3%) and repair and maintenance (0.5%). However, on a quarterly basis, output has flatlined, with no growth evident in the three months to February – this doesn’t demonstrate the government is achieving its goal to ‘get Britain building again’. And although housing starts in 3Q2024 were up by 10.9% on the number of dwellings started in the previous quarter, completions were down by 21.4%, compared to the previous quarter, and 12.9% less than completions in 3Q2023. This indicates the government will have a considerable challenge in reaching its 1.5 million new homes target over the course of this Parliament.

There are also positive signs concerning inflation in the UK as it continues to fall – the Consumer Prices Index rose by 2.6% in the 12 months to March, down from 2.8% in the previous month. But it’s still above the Bank of England’s 2% target. And news that the economy grew in February this year, although positive, has been dampened by fears we’re yet to feel the impact of ‘Awful April’ – this month, millions of households face several price hikes and tax rises for businesses will come into effect.

While recessions are painful, stagflation is more problematic due to the complications that can arise from using the usual levers to grow the economy. Typically, in a recession, a government will invest in fixed capital and infrastructure projects to build investor confidence and attract finance. This method generally succeeds unless it’s coupled with the high inflation that characterises stagflation. In a period of stagflation, investment tends to compound inflation. This is because growing the economy can cause wage prices to spiral and once this process is set in motion, it’s difficult to mitigate, i.e. the more money there is in the economy, the more prices will increase. This spurs on the need for wage growth to limit the impact of price increases and, subsequently, businesses will increase their prices to offset wage increases, further spurring on inflation and a difficult pattern to break.

The most obvious example of stagflation in recent history occurred in the 1970s, where inflation rose to double figures (reaching almost 25%), due to higher oil prices, triggered by the Yom Kippur War in 1973 and subsequently the Iranian revolution in 1979.

Trump’s trade war: the implications for construction

The strategy behind Trump’s renewed trade offensive is likely aimed at halting China’s ascent as a global economic superpower. Tariffs on imported goods are intended to localise American production and reduce reliance on foreign supply chains.

The UK economy and, indeed, the UK construction industry, have weathered a succession of external shocks in the last five years that have resulted in high inflation and low growth. But this is probably the first time it’s facing a potential threat from a government it’s always considered to be an ally.

By their nature, tariffs tend to be inflationary. The Bank of England (BoE)⁽²⁾ has said it’s too early to speculate on the appropriate monetary policy response, although commentators have suggested supply chain disruptions could cause upward pressure to inflation. Therefore, it’s unlikely the BoE will reduce the base rate more than twice this year, a move that could further negatively impact investment and lead to ongoing stagnation in the wider economy.

The importance of UK yields

On the whole, it’s unlikely the construction sector – specifically the steel trade – will suffer a direct hit, due to the tariffs. We tend to have a balanced trade picture with the US that’s service rather than manufacturing-based and rely more on Europe and the Far East for the export of manufactured goods. However, any volatility in a country that holds such immense economic power will inevitably have a knock-on effect for us, not least as the dollar remains the world’s principal reserve currency, which has been the case since the end of the Second World War.

Before Trump announced the 90-day reprieve, the US bond markets – normally viewed as a safe haven – appeared to lose their safe status, almost immediately. Commentators pointed to the high number of investors dumping them and the possibility of the federal reserve needing to intervene, should the bond markets malfunction. If the budget deficit increases in the US, this could also impact borrowing costs. There’s nothing to say this couldn’t have a similar impact in the UK. As the markets proved, nothing happens in isolation; yields on UK government bonds hit a peak of 5.617% in response to the tariff announcements, their highest point since 1998.

As one commentator, Mohammed El Erian, chief economic advisor at Allianz, put it: ‘When US treasuries sneeze, UK government bonds catch a cold’ – highlighting that this development could put more pressure on the UK budget; eroding fiscal headroom and weakening growth. For a government that’s already feeling the squeeze, this doesn’t spell good news for the Chancellor Rachel Reeves, as it could further limit the amount of public investment and spending that’s available. It could also further erode investor confidence, which is so desperately needed for projects, such as the Lower Thames Crossing.

What could the government do to avoid deeper economic trouble?

The UK appears to be entering a mild stagflationary environment, with inflation above the 2% target (currently at 2.6%) and minimal growth. The options to mitigate its impact are limited:

• Interest rate cuts may offer short-term relief but could reignite inflation.
• Public investment could stimulate construction, but the UK’s self-imposed fiscal rules (as upheld by Reeves) limit government borrowing.

Breaking those rules could free up much-needed funding for infrastructure. However, this move could prove particularly unpopular, considering the ramifications of the Truss/Kwarteng mini-budget episode that occurred the last time this happened. Anything to further rock the already fragile market confidence could prove damaging, especially as investors remain wary of policy instability.

Potential opportunities for the UK

Conversely, there could also be some positive outcomes for the UK economy and construction sector. Its relatively low tariff rates could make it a desirable production hub for companies seeking to export to the US without facing higher tariffs. This could lead to new manufacturing facilities, potentially stimulating construction demand. And although turbulence in the US bond market could cause UK bond yields to rise, there’s a counter argument that a loss of confidence in the US bond market may well be a positive for the UK, as investors look for safer havens.

In addition, the dumping of surplus manufactured goods, such as steel – as displaced Chinese or southeast Asian countries seek new markets – could reduce costs for UK developers. However, this could also undermine domestic producers who are already facing uncertainty.  The Scunthorpe steelworks is a recent case in point. Although the UK government has taken ownership of the site – amid fears its previous Chinese owner was planning to cease operations of two blast furnaces – the plant’s future ownership still hangs in the balance.

Could China retaliate against US allies?

For now, the most aggressive retaliatory responses appear to be playing out between China and the US. However, one of the more concerning potential developments is China’s retaliation – not only against the US, but also its allies, including the UK. This could take several forms with direct consequences for UK construction, especially in the mechanical, electrical, and plant (MEP) sectors.

China supplies a significant portion of the UK’s construction-related equipment and components, particularly in sustainable materials and components that are fundamental to the green economy – for example:

• Solar panels
• Air conditioning systems
• Heat pumps
• Industrial-scale batteries (e.g. for EVs and grid storage)

China could restrict exports of critical equipment or impose tariffs on UK-bound products. This could create shortages and cause costs to soar, potentially stalling progress on decarbonisation efforts and modern infrastructure delivery. Alternatively, China might flood global markets, including the UK, with cheap goods to offset its US export losses.

This could lower costs for developers in the short term but would pose long-term risks to domestic manufacturing sectors, including steel and renewables, so crucial to the government’s growth strategy.

Conclusion

Although the UK has avoided a technical recession, the threat of stagflation is growing – with inflation still above the BoE target and few signs of growth in either the economy or construction to herald optimism. While the UK may not be significantly impacted by Trump’s tariffs, the broader economic fallout could still be felt through rising bond yields and disrupted supply chains. Any more pressure on fiscal headroom could weaken investor confidence, as there will be less money available for public spending. This uncertainty could be further fuelled by the threat of delays to projects, caused by disruption to supply chains, as investors fear their returns could be eroded by inflation.

For construction, already under strain from falling new orders and ongoing insolvencies, the knock-on effects of global trade tensions could prove destabilising. While opportunities could arise from trade realignments and displaced global supply chains, these benefits are far from guaranteed and may come at the expense of domestic production. If adjusting fiscal headroom isn’t an option, the government needs to act fast to restore investor confidence and prove its edict to get Britain building again is more than just rhetoric.

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^{(1) Office for National Statistics – GDP monthly estimate, UK: February 2025  - here}

^{(2) Reuters – Bank of England’s Greene says dollar drop adds to tariff inflation puzzle  - here}