UK economy shows signs of strength but tariffs darken outlook

The U.K. economy is growing more strongly than expected.

The U.K. economy is growing more strongly than expected but U.S. President Trump’s barrage of tariff hikes and pauses threaten to stymie further acceleration ahead.

Gross domestic product increased by 0.5% in February, figures from the Office for National Statistics showed Friday. That was a better performance than the marginal growth economists had expected, and means the U.K. economy is very likely to record growth over the first quarter as a whole, barring an unexpectedly large reversal in March.

February’s growth was driven by strong output from Britain’s factories, with manufacturing production unexpectedly rising 2.2% on month on the back of a rise in output from auto plants, as well as in electronics and pharmaceuticals, the ONS said.

However, expansion in the British economy risks being dragged down by wider global economic malaise stemming from uncertainty around Washington’s trade policy.

After Trump last week unveiled a sweeping package of tariffs on goods imported into the U.S., London’s FTSE 100 index suffered four straight days of losses, enduring on Monday its worst trading since the Covid-19 pandemic. Stocks rallied later in the week after Trump agreed to halt a central part of the tariff package amid the turmoil roiling markets at home and across the globe.

But a 10% tariff will remain in place on U.K. goods, as will a separate 25% duty on cars and metals. At more than 15% of the total, the U.S. is the largest export market for U.K. goods, more than 58 billion pounds ($75.23 billion) worth of which crossed the Atlantic to America in the 12 months to last September, according to figures from the government’s business department.

That makes the U.K. less exposed to tariffs than some neighbors, such as Germany, which sent 160 billion euros of goods to the U.S. last year, or Ireland, home to the operations of many American drugmakers. British goods exports also pale next to services exports to the U.S., worth some 124 billion pounds a year, and not liable to Trump’s levies. But even a 10% tariff could knock Britain’s already fragile economic growth.

And policymakers at the Bank of England could be forced into cutting interest rates more quickly than they had foreseen in a bid to lift some of the smog clouding activity in the country.

“With the risks to the U.K. economy ramped up due to events of the last few weeks, rates could fall harder and more quickly from here,” said Michael Field, chief equity strategist at Morningstar.

Write to Joshua Kirby at joshua.kirby@wsj.com