The UK economy is poised for a significant transformation as it navigates rising inflation, fluctuating interest rates, and shifting market dynamics. Recent reports highlight a projected annual Gross Value Added (GVA) growth of just 1% in 2025, primarily influenced by external economic factors and persistent inflation.
According to analysis from EY, the average GVA growth across the UK is expected to stabilize at around 1.6% between 2025 and 2028, with London and the East of England leading the charge, each forecasted to achieve 1.7% growth during this period. These regions benefit from a concentrated presence of high-value sectors, including information and communication, professional services, and construction, which are expected to thrive in the coming years.
However, not all areas are experiencing similar prospects. The North East and Scotland are projected to lag behind with GVA growth rates of 1.3% and 1.4% respectively. The persistent challenges of inflation are impacting the overall economic momentum, which sees national GVA growth struggling at just 1% in 2025. London stands out as an exception, with an anticipated GVA uptick of 1.3% over the next year.
Rohan Malik, EY’s EMEIA and UKI Managing Partner, reflects on the economic outlook, stating, "The UK is forecast to make a welcome return to steady growth this year, but the varied mix of sectors around the country means that some areas will feel that uplift more than others." This disparity is echoed in predictions of employment growth across the regions, with London (0.9%), the East of England (0.9%), and the South West (0.8%) projected to see above-average job gains. In contrast, regions like the North East and Scotland anticipate slower growth of 0.5% and 0.4%, respectively.
The current inflation rate in the UK sits at 3%, with fluctuations observed in various sectors. Rising costs, particularly in food and energy, have influenced consumer spending patterns. The Bank of England has already implemented several rate cuts since August 2024; it has lowered interest rates three times in response to inflation trends and economic conditions.
Governor Andrew Bailey has noted, "Our approach to future cuts will be gradual and careful," alluding to the delicate balance needed in managing economic recovery without exacerbating inflation. The governor's comments come at a time when core inflation—excluding volatile food and energy prices—stands at 3.7%, indicating persistent underlying price pressures.
A unique component of this story is the real estate market, particularly in light of the e-commerce surge that has transformed consumer habits. Olaf Margeirsson, Head of Real Estate Research & Strategy for Europe ex DACH, asserts that real estate must adapt to economic shifts. He notes, "Real estate is the backbone of the economy... as the economy changes, so too must the real estate assets that support it." This paradigm shift is fueling demand for logistics facilities, with the investible logistics stock in key European markets expanding significantly.
Data reveals that between 2012 and today, the logistics sector in Europe expanded from less than 200 million square meters to over 380 million square meters, driven primarily by the demand from e-commerce sectors. The consequent rise in rents—over 100% in some markets—underscores the rapid adaptation of real estate investment strategies.
Anticipating continued growth, investments in high-value sectors are deemed essential for sustaining economic momentum across regions. Peter Arnold, EY UK Chief Economist, emphasizes the necessity for enhancing access to skills and investment. He notes, "High value sectors require a high value workforce, so enhancing access to in-demand skills through targeted education and improved transport links will be essential." This increased focus on skills and infrastructure development is vital for attracting business investments and fostering long-term economic stability.
As the UK prepares for further announcements regarding interest rates and economic strategy, all eyes will be on Chancellor Rachel Reeves, who is set to unveil her plans in a spring statement on March 26. The outcome is anticipated to outline strategies aimed at mitigating inflationary pressures and promoting growth across all sectors.
In sum, the current economic landscape presents both challenges and opportunities for the UK. By strategically focusing on sectors poised for growth and adapting to evolving market demands, the country can create a path towards prosperity amidst fluctuating inflation and economic hurdles. The complex interplay of rising wages, falling interest rates, and gradual economic recovery emphasizes the requirement for resilient and flexible strategies moving forward.
