Is the UK heading for a recession?

Having grappled with low growth and stubborn inflation for months, could Trump’s tariffs send the UK into recession?

Global stocks are plummeting in the wake of the wrecking ball that US president Donald Trump took to the world economy last week in the Rose Garden. While the UK was placed on the baseline rate of 10% on all its US exports, the interconnected nature of the British economy could mean that the disruption to global trade leads to a UK recession.

“Any hopes that last week’s two-day rout in global stock markets would be the full extent of market turbulence were confounded on Monday morning when first Asian and then European markets continued to plunge,” says Tom Stevenson, investment director at Fidelity International.

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“The downside risks to UK GDP growth from the indirect impact of tariffs are growing,” writes Ashley Webb, UK economist at Capital Economics. “Canada has hit back at the US by imposing a 25% tariff on imports of autos from the US, and China has announced a 34% retaliatory tariff on all US imports.

“The risk is that there is a further escalation, contributing to a bigger hit to the global economy and the UK is caught in the crossfire.”

With all these trade barriers being erected, the fear is that global inflation could skyrocket, even as growth falls.

Entering a recession would be bad news for the UK economy. However, it is far from guaranteed, and there are steps that can be taken in order to protect your assets from recession.

What is a recession?

Economists define an economic recession as two consecutive quarters of negative growth.

By this definition, the UK endured a mild recession in the second half of 2023, when the economy contracted by 0.1% during Q3 and 0.3% during Q4.

The last major recession in the UK was during the first half of 2020, brought on by the onset of the Covid-19 pandemic and subsequent lockdowns. While brief – the contraction only lasted two quarters – it was severe; the economy shrank 2.6% in Q1 of 2020 and 18.8% in Q2.

Since then, the UK economy has been fairly stagnant, but mostly in positive territory besides the late Q2 dip (and a 1% contraction during Q1 2021).

However, growth slowed at the end of 2024. GDP grew 0.1% during Q4, and was flat during Q3. It might not take much, then, to push the economy over the line into contraction in the coming months.

How likely is a UK recession?

As things stand, the consensus among economists is that the UK will avoid a recession this year, albeit narrowly. That view is under constant revision in light of the tariffs, though. A US recession would be bad news for the UK if it happens, and even being on the “right” side of the tariff regime can’t protect the UK against a shrinking US or global economy.

According to the latest available figures, the UK economy shrank by 0.1% in January. In February, the Bank of England revised its growth forecast for the UK economy in 2025 down to 0.75%, from 1.5%. That revision pre-dates the publication of Trump’s tariff regime, so the next Bank of England meeting – scheduled for 8 May – could see an update.

Other analysts that have seen the extent of the tariffs have, however, kept their UK growth forecasts for this year narrowly positive. Yael Selfin, chief economist at KPMG UK, forecasts 0.8% growth in 2025 and 2026.

Capital Economics’ forecast is one of the most pessimistic, but still puts the UK on track for 0.7% growth this year.

That’s not to say that the UK couldn’t experience two quarters of negative growth in that time, and analyst forecasts can often be proved wrong regardless. The balance of forecasts currently available, though, suggests that this won’t be the case.

The bigger problem, regardless of whether the UK enters a recession or not, is that GDP growth has been stagnant for some time, and that doesn’t look likely to change soon, tariffs or no tariffs.

“The year-on-year number of 1% growth indicates an economy stuck in first gear rather than reverse, but the outlook is now darkening significantly thanks to a probable global slowdown resulting from US tariffs on imports,” says Rob Morgan, chief investment analyst at Charles Stanley.

“It makes this Friday’s GDP number for February somewhat academic as these won’t in any way reflect the risks that lie ahead.”

Could the UK agree a trade deal with the US?

Prime minister Keir Starmer has repeatedly stated that he will only agree a trade deal with the US if it is in the national interest to do so.

Given the implications of the tariff regimes that the US has put in place, though, it seems likely that agreeing one is high on Starmer’s agenda.

“An invitation to meet the King led to some warm words from President Trump, which markets likely translate as a better chance of the UK negotiating away tariff impacts and avoiding retaliation,” writes Robert Wood, chief UK economist at Pantheon Macroeconomics.

Would a trade deal remove the chances of a UK recession, though? Wood goes on to point out that the UK’s economy is quite closely correlated with the US economy, as well as with global trade, with total trade accounting for 60% of GDP.

“The UK is exposed to a global slowdown… Larger-than-expected US tariffs will hurt GDP growth more than previously assumed, blowing back onto the UK relatively more than elsewhere,” he writes.

How should you invest in a UK recession?

In the face of short-term volatility and the risk of a recession, experts are recommending that British investors stick to the general principles of long-term investing in order to protect their capital.

Morgan suggests diversification and avoiding vulnerable businesses (such as those with lots of debt or whose industries are closely tied to the economic cycle, or that are in any way speculative) in favour of ‘inevitables’ – “good quality businesses… offering a unique proposition, dominating market share through a superior product or unparalleled channels of distribution”.

He also suggests resisting the temptation to try to time the market. “Many investors obsess over exactly when to invest, but trying to time the market is usually a losing battle. A recession can cause volatility in prices, but there’s no knowing when the low point will come – or if it has already passed.”

Investors can also consider allocating to defensive assets like gold or government bonds.

“Gold is already at record highs thanks to the uncertainty injected into financial markets this year,” says Ed Monk, associate director, Fidelity International. “The metal tends to perform best when fear is at its highest and has a track record of holding its value when other assets are vulnerable to falls.”

On bonds, Monk adds: “High-quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question. Unlike corporate bonds - those issued by companies - that face a raised risk of default during a recession, government bonds carry very low default-risk.”