Leading economists have issued a stark warning that the United Kingdom could be pushed into a recession by a new package of tariffs threatened by US President Donald Trump. The warning significantly raises the stakes for Prime Minister Keir Starmer as he navigates the escalating diplomatic crisis centred on Greenland.
Geopolitical Gambit Sparks Economic Alarm
The immediate trigger for the economic threat is a geopolitical ultimatum. President Trump has warned several leading European nations, including the UK, that he will impose additional 10% tariffs on imported goods if a deal for the annexation of Greenland is not agreed. This move has sent shockwaves through financial and political circles in London.
Analysts at the prominent research firm Capital Economics have calculated the potential damage. They estimate the tariff hit could amount to a staggering 0.75% of UK GDP, equivalent to approximately £22 billion. With the domestic economy currently growing at a fragile rate of just 0.2% to 0.3% per quarter, such a shock could be enough to trigger a technical recession.
A Recession Risk Hangs in the Balance
Paul Dales, Chief UK Economist at Capital Economics, provided a detailed assessment. "With the UK economy currently growing by 0.2 to 0.3 per cent a quarter, if this hit came all at once it could trigger a recession," he stated. However, Dales noted a potential mitigating factor, suggesting the impact is likely to be spread over many quarters, potentially softening the immediate blow.
City economists have also pointed to a possible short-term anomaly. There could be an immediate growth spurt in January 2026 as UK firms rush to boost exports ahead of the stated tariff deadline of 1 February. This would mirror activity seen before previous tariff deadlines, such as in April of the previous year.
Uncertainty and a Potential Transatlantic Rupture
Significant questions remain unanswered, adding to the uncertainty for businesses. It is unclear whether Trump's proposed tariffs would be applied on top of existing duties or if they would apply to all products, potentially undermining the standing US-UK trade deal. Dales also highlighted a legal challenge, noting a pending US Supreme Court decision on trade authority, which could be revealed as soon as Tuesday 20 January.
The UK's potential response forms a critical part of the economic calculation. Dales suggested that any US attempt to seize Greenland would severely damage transatlantic relations and NATO. "In that scenario, it’s hard to imagine the UK not siding with the EU. Arguably, then, the latest tariffs could nudge the UK closer to the EU and further away from the US," he concluded.
Prime Minister Starmer addressed the growing tensions on Monday 19 January, urging allies to engage in "calm discussion" regarding trade and diplomatic approaches to Greenland. He indicated the risks to the UK were "more direct now than at any time we can remember".
Investors Brace for Geopolitical Risk Premium
The market fallout is already being analysed. Lale Akoner, a market analyst at eToro, suggested Trump's threats would deepen "policy unpredictability" and contribute to lower investment levels. "For investors, this episode is less about Greenland and more about a geopolitical risk premium being repriced across currencies, equities and cross-border capital flows in the days ahead," Akoner said.
The coming days will be crucial, as the UK government balances its economic interests, its diplomatic alliances, and its response to an unprecedented demand from a key ally that now poses a direct threat to British economic stability.
