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UK GDP growth expectations for 2025 downgraded to 1% after a “weaker-than-expected” end to 2024, according to the EY ITEM Club Winter Forecast.
However, EY still expects steady quarter-on-quarter growth this year, as interest rates are gradually cut and increased consumer confidence leads to greater levels of household spending.
This represents only a marginal improvement on the 0.8% GDP growth the UK economy likely achieved in 2024.
Despite this, UK GDP growth is then expected to accelerate to 1.6% in 2026, in line with predictions made by the EY ITEM Club in October.
Anna Anthony, EY UK regional managing partner, said: “Despite the subdued finish to 2024, there are signs that the UK economy could turn a corner and achieve stronger levels of growth this year.
“Following a prolonged period of financial uncertainty, we should start to see an improvement in consumer confidence as real wages continue to increase, with many households feeling less of a financial squeeze by the end of 2025. This should, in turn, provide further support to UK growth.”
She added: “The outlook for UK business is more of a mixed picture. While business investment is set to increase, tightening financial conditions and global trade uncertainty are expected to weigh on private sector confidence in the first half of this year. As economic momentum starts to build, the Government will likely have more opportunities to bolster business confidence and reinforce the UK’s attractiveness as a destination for investment.”
According to the Winter Forecast, headline inflation will rise further above the 2% target in 2025 and will only return to 2% at the halfway point of 2026. Consumer Price Index (CPI) inflation is forecast to average 2.8% in 2025 as the drag from falling energy prices recedes and companies pass some of the cost of higher employer National Insurance Contributions (NICs) onto consumers.
Persistent inflation, balanced against the Monetary Policy Committee’s wariness of the national growth outlook and potential fragility in the labour market, should mean that the gradual pace of cuts to the Bank Rate continues through 2025.
The EY ITEM Club expects one cut of 25 basis points to be made per quarter, with the Bank Rate reaching 3.75% by the end of 2025.
The EY ITEM Club predicts that the Bank Rate will be cut to 3.5% in February 2026, where it is then expected to remain for a sustained period.
Consumer spending is forecast to rise by 1.6% in 2025 as household caution eases. While real income growth is set to slow from the rates seen in previous years, falling interest rates and a growing confidence in the UK economic outlook should offset this by prompting consumers to save less and spend more.
Matt Swannell, chief economic advisor to the EY ITEM Club, said: “A weaker-than-expected finish to 2024 left the UK economy with a greater hill to climb to achieve moderate growth this year, and GDP will likely struggle to accelerate beyond 1% in 2025. Nonetheless, the slowdown at the end of last year is expected to be temporary and the UK should see steady quarter-on-quarter growth throughout 2025.
“However, the easier progress on inflation has now been made and the harder work of navigating sticky domestic inflation will prove more difficult. Inflation is forecast to remain above the 2% target through much of 2025 as the effects of previous falls in energy and goods prices begin to wane. The labour market has loosened in recent months but the upcoming rise in employers’ National Insurance Contributions (NICs) will mean businesses continue to face elevated labour costs, even as pay growth slows.”
