Scottish economy 'turbulence' fear as Trump prepares to unleash tariffs

The start of 2025 has seen growing unease as firms prepare for “rising costs and escalating geopolitical tension - most notably the introduction of trade tariffs by US President Donald Trump”, according to the Fraser of Allander Institute.

The Stratchlyde University-based think tank also downgraded its economic forecasts for Scotland and highlighted concerns over the impending rise in employer national insurance contributions.

Mr Trump will unveil sweeping tariffs on goods from around the world on Wednesday, an event he has dubbed “liberation day”.

Chancellor Rachel Reeves warned on Tuesday the tariffs will damage the UK economy as Prime Minister Sir Keir Starmer acknowledged a transatlantic deal is unlikely.

The UK also appears unlikely to respond with immediate retaliatory measures, unlike other targets of Mr Trump’s sanctions, such as the European Union.

Sir Keir said businesses want a “calm and collected response to this, not a knee-jerk” and “nobody wants to see a trade war”.

But he said that “all options remain on the table” in response.

Asked if he had been “played” by Mr Trump amid efforts by Sir Keir to build a good relationship, the Prime Minister said: “The US is our closest ally. Our defence, our security, our intelligence are bound up in a way that no two other countries are.

“So it’s obviously in our national interest to have a close working relationship with the US, which we’ve had for decades, and I want to ensure we have for decades to come.”

Sir Keir said talks on a UK-US economic deal would normally take “months or years” but “in a matter of weeks we have got well advanced in those discussions”.

Mr Trump’s administration views the application of VAT as discriminating against US goods and could respond with a 20 per cent tariff on imports from the UK.

The US president has already announced a 25 per cent import tax will be introduced on all cars imported to the US, a measure which will be a blow to the UK’s automotive industry.

Some 16.9 per cent of UK car exports were to the US last year, representing a total of more than 101,000 units worth £7.6 billion. Tariffs on steel and aluminium imports, including from British firms, are already in place.

Elsewhere, experts warned tariffs could impact both businesses and consumers.

Matt Swannell, chief economic advisor to the EY Item Club, said: “US tariffs on goods imports from the UK could rise tomorrow, with survey respondents indicating that the possibility of higher tariffs is already weighing on demand for exported goods.”

He said the prospect of tariffs, coupled with weak domestic demand, is “seeing the sector cut jobs”.

Myron Jobson, senior personal finance analyst for Interactive Investor, said: “President Donald Trump’s tariffs war could have far-reaching consequences for Britons, even if the UK manages to escape direct levies.

“If tariffs contribute to higher inflation, central banks may be forced to tighten monetary policy, which can weigh on bonds and borrowing costs.

“This could impact everything from mortgage rates to corporate investment, potentially slowing economic growth.

“For investors with exposure to US equities – either directly or through pension funds and ISAs – this could translate into market turbulence.”

Conservative leader Kemi Badenoch claimed a trade deal is the “best way” to avoid tariffs and that retaliation will “make everyone poorer”.

She said: “A trade deal is the best way but it has to be something significant and comprehensive, not just a deal that tinkers at the margins in easy areas.

“Some people will want us to have trade retaliation, that just makes everyone poorer.

“This is a time for significant diplomacy and showing that actually, if you put tariffs on, the people who will suffer aren’t just our exporters but also the American consumer who will have to pay more.”

Some opponents urged the UK government to seek closer ties with Europe.

Scottish Green co-leader Lorna Slater said: "The attempts to praise and flatter Donald Trump have not worked. He is not our friend or ally and he never will be, no matter how much Keir Starmer pretends otherwise.”

Concerns were also raised by the Scottish Liberal Democrat MP Alistair Carmichael.

The Orkney and Shetland MP told The Scotsman: “Suggestions have been made that opening up our food markets to US produce – chlorinated chicken and hormone-treated beef – could be the price for an exemption to Trump’s tariffs. It is a concession that no previous government has dared to make and I cannot believe that this government would be foolish enough to try. If they do, however, then the backlash to Farage’s comments last week will look like a storm in a teacup by comparison.

“What this really points to is the need for the government to broker pragmatic agreements with the EU so that we are better insulated against these trade wars. We are better served working together than alone.”

With the increase in employers’ national insurance contributions due to take effect from Sunday, the Fraser of Allander Institute said there are now "growing concerns that economic growth could remain sluggish in the near term".

And while the think tank had forecast in January that Scotland's economy would grow by 1.3 per cent in 2025, and then by 1.2 per cent in 2026, the April commentary downgraded these.

Economic growth of 0.9 per cent is now expected this year, with 1.1 per cent forecast for 2026.

The think tank said the change was due to "ongoing concerns over global economic fragility, tighter UK fiscal policy, and lingering inflationary pressures".

Professor Mairi Spowage , director of the Institute, stated: "Economic conditions in 2025 are turbulent and uncertain, and are likely to remain so throughout the year.

"Therefore, the picture is still one of subdued growth. Many of the challenges businesses faced in 2024 - from rising costs to policy uncertainty - have not gone away."

She added that additional pressures from the hike in employer national insurance charges, together with geopolitical instability "risk dampening confidence and growth further".

Prof Spowage added: "These tax changes will start to hit businesses next week, with many scaling back plans for workforce expansion and recruitment as a result."

Her comments came as data from the institute's Scottish Business Monitor showed that 94 per cent of firms expect cost pressures to increase in the first half of 2025, with three in four businesses highlighting the national insurance changes as a significant concern.

And although UK headline inflation fell to 2.8 per cent in February, the think tank said this was "unlikely to bring significant relief to Scottish households".

It said that services inflation, which covers the change in costs for services, was still "elevated" at 5 per cent, as it warned that "further price increases are expected to strain household budgets".

Deputy First Minister Kate Forbes said the think tank's forecast "reflects the difficult economic landscape we are facing across the UK", adding that the warning of further potential price rises would "be concerning to households and businesses".

Ms Forbes said: "The threat of further trade tariff increases, the cost-of-living crisis and the unwelcome rise in employer national insurance contributions present real challenges for our economy.

"I would encourage the UK Government to think carefully about any further measures which could damage our economy or push more people into poverty, such as its planned welfare cuts."