UK economic outlook

The UK economy surpassed expectations in Q1, growing by 0.7% on the quarter. However, a collection of headwinds were encountered at the beginning of Q2 that are expected to slow growth. We project GDP to expand by 1.2% in 2025, slightly up on last year but firmly below the historical trend. A series of further sub-trend growth rates are expected over the medium-term forecast horizon, with the economy lacking momentum.

UK CPI inflation rose to 3.5% in April, its highest reading since January 2024. The main driver of the acceleration was household bills, such as energy and water. In addition, employment cost increases may put further upward pressure on inflation. Between these factors, we expect inflation to peak at 3.7% mid-year and average 3.3% across 2025. As a result, we expect the Bank of England to maintain a cautious approach to monetary loosening, with only one further cut to interest rates this year.

In terms of UK regions, London, the North East, and the North West are expected to lead growth in 2025. The devolved nations, particularly Wales, are projected to grow at a slower pace.

Trade policy changes have driven a firm downgrade to our US growth forecast. We project GDP growth of 1.4% in 2025 and 1.6% in 2026, sharply down on recent history. The effects of these policy changes, and the uncertainty surrounding them, are also clouding the global outlook. Amongst other countries, our forecasts have also been downgraded for Canada and Mexico. Eurozone growth is also projected to be weaker, at 0.8% in 2025.