UK economy will ‘struggle’ to grow more than one per cent in 2025
The UK economy will “struggle” to grow by any more than one per cent this year, according to EY, a significant downgrade on its previous round of forecasts and a major blow to Chancellor Rachel Reeves.
The Big Four firm slashed its 2025 growth projections to 1.0 per cent, down from the 1.5 per cent forecast back in October.
This would represent only a marginal improvement on the 0.8 per cent expansion most economists have pencilled in for annual growth across 2024.
“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 one per cent in 2025,” Matt Swannell, chief economic adviser to the EY Item Club, said.
“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,” Swannell said.
Looking into 2026, EY expects growth to accelerate to 1.6 per cent, which was unchanged on its previous round of forecasts.
Anna Anthony, regional managing partner at EY, said the government will have “more opportunities to bolster business confidence” and attract international investment as momentum picks up.
Still, the forecasts are a blow for the government just days after it tried to reset the narrative on growth following a torrid first six months in power.
The economy has been more or less stagnant since last July’s election, with many economists pointing to the impact of the government’s gloomy rhetoric and the Budget tax hikes.
EY is the latest firm to downgrade their growth forecasts for 2025. Goldman Sachs and Morgan Stanley both think that the UK economy will grow by less than one per cent this year.
Inflation will also be slightly higher than EY previously forecast, partly due to the impact of the government’s national insurance increase and higher energy prices.
Inflation will average 2.8 per cent across 2025, up from a previous projection of 2.5 per cent, only returning to the two per cent target halfway through 2026.
The combination of subdued growth and sticky inflation will mean that the Bank of England sticks to a “gradual” pace of interest rate cuts, EY said.
The firm forecast that the Bank would cut interest rates four times in 2025, with one 25 basis point reduction every quarter. It predicted one further cut in 2026, bringing the Bank Rate to 3.5 per cent where it will remain for a “sustained period”.