The latest economic forecasts indicate the UK is set for a slower growth pace than initially predicted, raising concerns for policymakers and consumers alike. The EY Item Club has revised its projections, placing UK gross domestic product (GDP) growth at just 1% for 2025, down from the previous estimate of 1.5%.
The revision emerges amid mounting pressures on businesses as they brace for upcoming tax and wage increases slated for April. This latest data reflects stagnation experienced late last year, when GDP growth was reported at only 0.8% across the economy, and signals continued unease about the country’s economic performance.
On the subject, Chancellor Rachel Reeves faces difficulties realizing her ambitions for rapid economic growth, which are necessary to sustain the Labour Government’s spending plans. According to Anna Anthony, EY UK regional managing partner, “Despite the subdued finish to 2024, there are signs the UK economy could turn a corner and achieve stronger levels of growth this year.”
Unfortunately, the economic outlook remains fragile as businesses grapple with the impacts of the last quarter of 2024, which included surprising downturns: November saw only a 0.1% rise and October recorded a 0.1% decline. Reflecting on this, the forecast sufficiently depicts the UK’s struggles with growth.
Interestingly, the projections do hint at potential recovery, with economists predicting growth to escalate to 1.6% by 2026. Yet, household confidence is expected to experience some uplift, with consumer spending forecasted to rise by 1.6% later this year. Consumer Price Index (CPI) inflation is another pressing issue, remaining above the Bank of England’s target of 2%, with averages projected at 2.8% as firms bear the burden of increased costs from national insurance contributions.
Adding to the economic picture, input prices for UK manufacturers skyrocketed at the fastest rate seen in two years as of January, indicating persistent inflationary pressures. The S&P’s purchasing managers’ index (PMI) revealed the manufacturing sector saw input prices rising at “accelerated rates” due to suppliers adjusting prices to accommodate their heightened costs.
Rob Dobson, director at S&P Global Market Intelligence, noted, “Cost pressures are rising and will likely continue to do so as changes to the minimum wage and employer NI announced in last year’s Budget feed through.” Despite the pressure, the PMI indicated slight improvements, exhibiting 48.3 for January up from December's 47.0, even if it remained below the neutral threshold of 50 which signifies economic expansion.
The report underscored weak demand and plummeting business and consumer confidence as key elements driving the slowdown. Specifically, the consumer goods industry has felt the pinch, as companies faced dwindling new orders for the fourth consecutive month, prompting many to reduce staff levels at the fastest rate in nearly one year. To put it succinctly, business optimism is near its lowest point in two years.
Highlighting the precarious situation, Dobson added, “A stagnant economy and rising cost burdens leave policymakers with a real dilemma, balancing the need for rate cuts to support flagging growth and a declining labour market against the need to contain inflationary pressures.”
With the Bank of England's upcoming interest rate decision looming, the industry awaits clarity on how to navigate these challenging times. Although traders are anticipating potential rate cuts to stimulate growth, the economic forecast remains clouded by return inflationary pressures. With the year progressing, the focus will undoubtedly remain on how the UK can maneuver through this turbulent economic period and whereby confidence can be restored among businesses and consumers.