Growth and the known unknowns of trade

In economics, certainty is never a given, yet this is particularly true when Donald Trump is at the table. Since returning to the White House, his administration has torn up recent American orthodoxy regarding geopolitics and trade.

To borrow from a former US Secretary of State, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know.

The UK government will hope it can deal with the known unknowns of a Trump White House, while wishing for as few unknown unknowns as possible.

It is against this backdrop that Sir Keir Starmer and Rachel Reeves’ mission for growth must be fought and won. As we’ve noted before, much of this mission may lie in forces well out of the UK government’s control, and yet last week’s growth figures—real GDP of 0.7 percent in the first quarter of the year on an annual basis—will still be a cause for celebration in Downing Street.

As Professor Morten Raven of UCL Economics makes clear, growth of this kind is much needed and would put the UK into the lead amongst G7 nations, the favoured measure of success of Reeves and Starmer.

“Based on such early indicators, the UK’s performance was positive relative to that of many other countries, and especially the US where growth appears to have stalled in the first quarter of 2025. This follows two quarters of meagre growth.”

With the bonus of having come from what economists call ‘fixed capital formation’, this is the kind of growth that entails real investment in assets, which should assist in tackling the UK’s long-term challenge around productivity growth and GDP per capita.

Yet Raven also points to the challenges for the UK Government. For this growth to be felt by ordinary Britons, it must remain sustained and ongoing in the coming years, something the current global trade climate may make difficult.

“It is worth pointing out though that there are large uncertainties surrounding whether this is a turning point of not given that such early estimates are often significantly revised. Moreover, seen over a longer period of time, UK is still struggling to deliver solid growth in the economy. UK real net domestic product per capita is still below its pre-pandemic level and more than 6 percent below its pre-pandemic trend level. Only strong growth over the coming years can correct for such poor performance since the pandemic”.

As we explored at our recent conference following the local elections, focusing on the core foundations of the UK economy remains central, and the US’s willingness to remain open is a crucial factor in sustaining growth in the long term.

For Raven, this is crucial. “Geopolitical risks remain and especially surrounding international trade. The US is the UK's largest export market. In 2023, for example, the UK exported goods and services to the US for a value of close to £180bn, corresponding to approximately 20 per cent of total UK exports. Exporting firms are typically the most productive firms in the economy and their employment and investment decisions are likely to suffer from the uncertainties related to their access to the US market and the wider outlook for international trade relationships.”

In short, Trade will remain crucial. News that the UK is seeking greater cooperation with the EU, its other major trading partner, will provide further hope of improved growth. Yet, the political challenges of Trump and geopolitics remain. Ultimately, how the UK manages its fraught relationship with the EU and US could well come to define this first term Labour government.