UK quarterly economic outlook – Q1 2025
Global events and inflationary pressures weigh on growth, but UK economy shows resilience.
12 March 2025
Weak growth and stagflation persist into 2025 after a disappointing end to 2024, but the economy should improve as the year progresses.
Interest rate cuts are set to continue despite rising inflation and strong wage growth.
Global uncertainty means the external sector is suffering, with tariffs and financial market volatility posing the biggest risks.
Partner
“The UK economy has had a sluggish start to 2025, driven by weak external growth and global uncertainty around tariffs. While disappointing, the outlook may not be as bleak as it first appears. Increased consumer and government spending should help give the UK economy a much-needed boost in the second half of the year, before returning to ‘normal’ in 2026.”
Hopes for a surge in growth in 2025 have been dampened by a slow end to last year and the looming threat of a global trade war. The external sector is the biggest weight on the economy, with a 3% drop in exports stifling growth in the final half of 2024.
However, when looking below the surface, the domestic economy has performed much better. Consumer spending grew by about 0.6% in the second half of last year. This, combined with increased government spending, should boost growth as we move through the year.
- UK inflation
- UK labour markets
- UK interest rates
- UK economic outlook
- UK economy vs Global economy
UK inflation
Headline inflation has already risen to 3% in January and will likely hit 3.5% by the middle of the year, partly due to measures announced in the 2024 Autumn Budget, such as VAT on private school fees. However, most of the rise in inflation this year will be driven by one-off factors or rising energy prices. Domestically generated inflation will be much weaker than the headline numbers suggest.
UK labour markets
Preliminary data suggests that the labour market has held up better than expected, easing gradually rather than seeing a sharp rise in unemployment. Of course, the steep increase in National Insurance cost to employers announced in the 2024 Autumn Budget won’t come into effect until April, so there remains the possibility of a sharp decline in employment. But, a subdued outlook for employment seems more likely than a complete collapse.
UK interest rates
The labour market’s surprising resilience and stronger-than-expected wage growth have put pressure on the Bank of England’s (BoE) 2% inflation target, casting doubt over the frequency of interest rate cuts. However, the nightmarish combination of weak growth with above target inflation means we anticipate the Monetary Policy Committee (MPC) will continue its "careful and gradual" rate-cutting strategy, reducing rates by 25 basis points (bps) at every other meeting this year.
UK economic outlook
Amid an underwhelming start to the year, we expect domestic growth to help the UK economy get back on track, driven by a rise in real household disposable incomes and increased government spending. The real challenge lies in the external sector, with weak international growth and the potential threat of tariffs continuing to weigh heavily on growth prospects.
UK economy vs Global economy
Even with the uncertainty around global trade and tariffs, we still expect the US to continue to outperform other major economies, although growth should pick up in the UK and Eurozone over the coming months. Inflation, however, is rising in all developed economic regions. It’s already back at 3% in the US and UK and could be further worsened as the new US administration clarifies its trade policy.
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