UK QUARTERLY ECONOMIC OUTLOOK | Q1 2025
A word from our economist
Growth down, inflation up – but it’s not as bad as it seems
2025 was the year the UK economy was supposed to return to growth. But these high expectations are now likely to be seriously disappointed. A very slow end to last year, a sluggish start to 2025 and the threat of tariffs have muted any hope of a more positive 12 months than last. In the first outlook of 2025, we have slashed our growth forecast for this year to just 1% and raised our inflation forecast to an average of 3%. The year that was supposed to see a return to growth is now en route to be yet another year defined by ‘stagflation’.
However, look beneath the surface and things are not as bad as they first appear. The external sector (where countries trade internationally) is suffering, but the domestic economy is looking healthier. On the horizon, 2026 will look brighter, as growth is expected to accelerate gradually throughout this year and as inflation also trickles down.
What’s gone wrong for economic growth in the UK?
Before getting into how we think this year will evolve, it’s worth looking at why 2025 won’t be the return to growth that was promised.
Weak growth among our key trading partners, amplified by global uncertainty around tariffs, contributed to a big drop in exports in the second half of 2024. Indeed, rather than adding 0.3 ppts to growth in H2 2024, as the Office for Budget Responsibility (OBR) had expected, net trade knocked 1 ppt off growth.
Fortunately, the domestic economy has performed much better. Consumer spending grew by about 0.6% in the second half of last year, contributing 0.4 ppts to economic growth. Despite a large fall in business investment in Q4, total investment has performed much better than expected, adding another 0.4 ppts rather than subtracting 0.5 ppts as the OBR expected. Although government spending has been a little weaker than expected, it has still added to growth.
Ultimately, external factors let down growth in the second half of last year. The economy probably isn’t in as bad a shape as recent headlines suggest. But weak growth in Europe and China, coupled with uncertainty around tariffs, makes it unlikely we’ll see a resurgence in demand for UK exports. The situation could even worsen, posing a significant risk to economic growth in 2025.
Contribution to GDP growth (ppts H2 2024)
