The UK economic outlook for 2025

The economic outlook for the UK in 2025 presents a mixed picture, with expectations of modest growth tempered by persistent inflationary pressures.

Growth Projections

The Organisation for Economic Co-operation and Development (OECD) has revised its forecast for UK economic growth in 2025 upward to 1.7%, citing increased government spending as a key driver.

This adjustment reflects the UK's resilience amid global economic uncertainties and aligns with its broader strategy to stimulate growth through fiscal policies and structural reforms.

Inflation Concerns

Despite the positive growth outlook, inflation remains a significant concern. The OECD projects that UK inflation will average 2.7% in 2025, the highest among G7 nations. This is attributed to strong wage growth and elevated services inflation, indicating persistent domestic price pressures.

Monetary Policy

In response to these dynamics, the Bank of England (BoE) has begun adjusting its monetary policy. In November 2024, the BoE reduced its interest rate from 5% to 4.75%, marking the second cut since 2020. However, the BoE has signalled that future rate reductions will be gradual, given the rising inflation expectations.

Analysts anticipate that the BoE will continue to lower rates cautiously throughout 2025, potentially reaching 3.75% by year-end.

Fiscal Policy and Public Debt

The UK's fiscal policy is poised to play a pivotal role in shaping the economic landscape. The March 2024 budget introduced measures aimed at stimulating growth, including increased public spending and tax adjustments. However, these initiatives have raised concerns about fiscal sustainability, with public debt projected to rise to 92.8% of GDP in 2025.

The OECD warns that the UK's stretched public finances may limit its capacity to address potential economic shocks in the future.

Labour Market and Business Sentiment

The labour market is expected to experience moderate improvements, with businesses expressing cautious optimism. Surveys indicate that a significant proportion of firms anticipate revenue growth and increased hiring in 2025, supporting the government's efforts to revive economic growth.

However, challenges such as rising national insurance contributions and persistent inflation may temper this optimism.

Conclusion

In summary, the UK's economic outlook for 2025 suggests a period of modest growth accompanied by persistent inflationary pressures. The interplay between fiscal stimulus and monetary policy adjustments will be crucial in navigating these challenges. While increased government spending may bolster economic activity, concerns about inflation and public debt sustainability remain pertinent. Stakeholders, including policymakers and businesses, will need to balance these factors to foster a stable and sustainable economic environment in the coming year.