The UK economy is showing signs of fatigue, with growth slowing sharply in the second quarter of 2025 and experts warning that the country may be inching towards a recession unless decisive action is taken. Recent data from the Office for National Statistics reveals that the economy expanded by just 0.3% between April and June—a significant drop from the 0.7% growth seen in the first quarter. While there was a brief uptick of 0.4% in June, the overall picture remains one of stagnation and uncertainty.
This slowdown comes on the heels of a surge in exports earlier in the year, as businesses rushed to ship goods ahead of the introduction of new tariffs. But that export-driven momentum has faded, leaving the UK’s economic engine sputtering. According to Professor Joe Nellis, an economic adviser at accountancy and advisory firm MHA, the latest figures “underline the challenge facing Chancellor Rachel Reeves ahead of the Autumn Budget.”
“Sluggish economic growth means tax revenues will not reach the levels needed to maintain the government’s current fiscal strategy,” Professor Nellis warned on August 15, 2025. “The Chancellor may be forced to raise taxes in the Budget to keep the ship afloat.”
The roots of this malaise stretch deep into the behavior of UK households. The savings ratio—the proportion of disposable income not spent—peaked at a remarkable 12% in late 2024 and has stubbornly remained above 10% ever since. Figures from the Office for National Statistics show the savings rate hit 11.1% in the first quarter of 2024, up from 9.3% in the final quarter of 2023. That’s the highest level since the third quarter of 2021, and it’s a figure that’s sending shivers down the spines of policymakers and business leaders alike.
Why does this matter? High household savings can certainly be a sign of prudence, but they also mean consumers are holding back on spending. That, in turn, reduces demand for goods and services, slows business revenues, and discourages investment. Professor Nellis put it bluntly: “Lower consumer spending can slow business revenues, discourage investment, and ultimately dampen economic growth. If this persists, it can lead to weaker job creation and a risk of recession, as the economy relies heavily on household consumption to drive activity.”
Historically, savings levels this elevated have only been seen during periods of major economic stress—think the early 1980s recession, the downturn of the early 1990s, the aftermath of the 2008 financial crisis, and the pandemic. The current pattern, then, is ringing alarm bells. Many households, stung by recent tax hikes and ongoing uncertainty, are opting to play it safe rather than splurge.
The government, meanwhile, finds itself in a bind. Chancellor Rachel Reeves has pledged “iron discipline” over public finances and emphasized that “every commitment we make must be fully funded. That’s the approach I will bring to the Treasury.” This commitment to strict fiscal rules leaves Reeves with two unpalatable choices: cut public spending or raise taxes. But with strong opposition within the Labour Party to spending cuts, the likelihood of tax increases in the upcoming Autumn Budget seems to be growing by the day.
Capital Economics, a leading consultancy, told its clients in June that “despite the overshoot in May, public borrowing was £2.9 billion below the Office for Budget Responsibility’s forecast in the first two months of the fiscal year.” However, the firm added a cautionary note: “The OBR may still revise up its borrowing forecasts from March in the Autumn Budget. That and already-tight spending plans mean tax hikes later this year appear increasingly likely.”
For businesses, there is a sliver of good news. A recent interest rate cut has provided some relief, making borrowing a bit more affordable and potentially encouraging investment. But as Professor Nellis pointed out, “further cuts would be welcome” to help support the fragile recovery. The hope is that lower rates might nudge consumers to open their wallets, but so far, the high savings ratio suggests that caution is winning out over optimism.
Beyond interest rates and fiscal policy, the UK’s economic fortunes are also tied to global conditions and the ease of exporting to the world. The earlier export surge offered a brief reprieve, but new tariffs and trade barriers are likely to make life more difficult for British businesses in the months ahead.
As the Autumn Budget approaches, the stakes could hardly be higher. Reeves must walk a political and economic tightrope: raise taxes and risk further dampening consumer confidence, or cut spending and face resistance from her own party and the broader public. Either way, the government is under immense pressure to find ways to inject momentum into the UK economy.
Professor Nellis summed up the dilemma: “The economy relies heavily on household consumption to drive activity. If spending doesn’t pick up, we face weaker job creation and slower growth.” With the next few months seen as critical for restoring confidence, all eyes are on the government’s next moves.
Adding to the uncertainty is the specter of recession. Experts warn that if weak consumer confidence persists and tax hikes become a reality, the UK could tip into a downturn. The warning signs are there for anyone willing to look: sluggish growth, high savings, and a government boxed in by its own fiscal promises.
One factor behind the current high savings rate is the public’s reaction to Reeves’ recent tax policies. Many families, facing higher tax bills, have become more acutely aware of the need to save for a rainy day. This shift in behavior is understandable, but it also means less money circulating in the economy—a classic recipe for sluggish growth.
The government’s options are limited, but the need for action is urgent. As Professor Nellis noted, “Economic recovery will depend on global conditions and the ease of exporting to the world. The government needs to find a way to inject momentum into the UK economy—but that is easier said than done.”
In the end, the path forward is fraught with risks. The UK economy is at a crossroads, and the decisions made in the coming months will shape its trajectory for years to come. Whether Reeves and her team can navigate these treacherous waters remains to be seen, but one thing is clear: the status quo is no longer an option.
