The UK economy is projected to grow at a slower pace than previously anticipated, with new forecasts from the EY Item Club indicating significant downgrades to growth predictions. The forecaster’s report suggests the UK gross domestic product (GDP) will only increase by 1 percent in 2025, down from the earlier estimate of 1.5 percent. This adjustment reflects the economic pressures faced by businesses, as they brace for additional tax and wage increases scheduled for April.
The EY Item Club's winter projections come on the heels of disappointing economic performance at the close of 2024 and represent yet another blow to Chancellor Rachel Reeves’s ambitious plans to rejuvenate the UK economy to support Labour's spending initiatives. Notably, the report pointed out only minor growth of 0.8 percent across the economy last year, emphasizing stagnation and a mixed recovery outlook.
Following what was described as a weaker second half of 2024, the UK witnessed just a 0.1 percent rise in GDP for November, and even experienced a slight decline of 0.1 percent the previous month. The economy had flatlined in the third quarter, indicating pervasive challenges. While 2026 may offer brighter prospects, with forecasts predicting potential growth at 1.6 percent, the immediate future remains uncertain, and businesses face significant hurdles.
Chancellor Reeves recently addressed these issues during a comprehensive speech detailing Labour’s intentions to stimulate new developments across the UK, emphasizing regeneration projects aimed at boosting economic activity from north to south. Despite the tumultuous backdrop, she aims to convey a central message of hope for economic growth.
"Despite the subdued finish to 2024, there are signs the UK economy could turn a corner and achieve stronger levels of growth this year," noted Anna Anthony, EY UK regional managing partner. "Following a prolonged period of financial uncertainty, we should start to see improvement in consumer confidence as real wages continue to increase, allowing many households to feel relief from financial pressures by the end of 2025."
While some positive indicators are present, the EY research amplifies concerns about the mixed outlook for UK businesses. Although business investments are predicted to rise, tightening financial conditions and global uncertainties threaten to stifle private sector confidence, particularly during the first half of the year.
Consumer confidence, on the other hand, appears to be on the rise, with projections estimating consumer spending to increase by 1.6 percent over the upcoming year. This upswing, nevertheless, exists amid persistent inflationary challenges, as the Consumer Price Index (CPI) inflation is expected to remain above the 2 percent target rate throughout the year, with averages estimated at 2.8 percent.
Analysts pointed to the inflationary pressures as being partly due to higher employer national insurance contributions (NICs), which are likely to be passed down to customers. The EY report indicated persistent inflation could prompt one interest rate cut per quarter this year, with UK interest rates expected to hit 3.75 percent by the end of 2025. The overarching message from these forecasts paints a picture of cautious optimism, with potential for improvement tempered by significant risks on the economic horizon.