UK economic outlook

The UK economy faltered in the second half of 2024, leading to the second consecutive year of negative GDP per capita growth. Consumer spending is weak despite strong wage growth, and business investment is falling due to low confidence.

Headline inflation hit 3.0% in January and will pick up further in the near term due to increases in employer National Insurance Contributions and National Living Wage increases pushing up price and wage growth. Inflationary pressures will subside in the medium term due to weak household consumption and the continually easing labour market, which will gradually feed through to lower pay growth. This will lead the Bank of England’s Monetary Policy Committee to cut interest rates gradually, to 3.25% by the end of next year.

We expect the UK economy to grow slightly faster in 2025 than last year, at 1.1%. This still represents a subdued level of economic activity. Government consumption will support growth after measures announced at the Autumn Budget led to a larger state, but private consumption will underperform again. The unemployment rate will continue to rise to a peak of 4.7%, before conditions improve due to easing core inflation and the lagged impacts of looser monetary policy.

However, risks are weighted to the downside. It is likely that the government are not on course to meet its fiscal targets, due to worsening economic conditions. Therefore, the spring statement may bring further cuts to government spending. Uncertainty from US tariffs is hurting confidence and causing ongoing financial market volatility. We already expect worldwide growth to be lower, impacting global trade, including for the UK. In the US, interest rates are already higher than they might have been without tariffs, prices are expected to rise, and there is a sharp decline in near-term economic indicators.