UK QUARTERLY ECONOMIC OUTLOOK | Q1 2025
The UK vs Global economy
US outperformance to continue despite policy uncertainty
Despite policy uncertainty we expect the US to continue to outperform other major economies this year. Robust consumer demand, strong fiscal spending and continued growth in the labour market has allowed the US to grow by just over 15% since the start of 2019, compared to roughly 5% in the UK and Eurozone. However, the uncertainty generated by gyrations in tariffs is having a material impact on US growth. The US economy deteriorated sharply in Q1 due to a surge in imports as companies tried to get ahead of tariffs. But business and consumer surveys have also soured and growth in the US is likely to slow this year.
In Europe, a huge increase in defence and infrastructure spending over the next decade will significantly boost growth. While this will probably not come soon enough to impact growth this year, the proposed fiscal measures could add 0.5ppts to eurozone GDP next year, which would push growth close to 2%.
Inflation is back on the rise in all developed economic regions. In the US and UK its already back at 3%, the Eurozone is slightly cooler around 2.5% reflecting weaker growth as key economies continue to struggle. Inflation prospects could be worsened across the global economy as the new US administrations trade policy becomes clearer, the Eurozone looks likely to face tariffs later in the year but the picture is less clear for the UK. What’s more, a surge in fiscal spending could further add to inflationary pressures from next year.
Trade uncertainty and rising inflation has meant the Federal Reserve has already signalled it is in no rush to cut rates as it contemplates the effect of potential tariffs on inflation, but the recent deterioration in growth means financial markets are still expecting rate cuts. Meanwhile we expect the European Central Bank and BoE to continue to cut rates gradually to support a weaker growth environment in Europe.
The big uncertainty is what economic policies the new US administration will pursue. The combination of tariffs and large domestic tax cuts could lead to higher inflation in the US, resulting in fewer interest rate cuts and lower growth. At the very least an increase in financial market volatility and uncertainty will take a toll on global growth.
Real GDP (Q1 2019 = 100)
Economic forecasts
