UK QUARTERLY ECONOMIC OUTLOOK | Q3 2025
A word from our economist
Can the UK economy maintain its momentum?
With consumer confidence still well below its pre-pandemic average and business investment stagnant, it might surprise many that the UK was the best performing G7 economy in the first half of 2025. That highlights an unhelpful gap between what the economy feels like and how it's actually performing. The risk is that speculation about more tax rises depresses confidence further, which derails the solid first half performance.
Admittedly, the growth picture looks more challenging from here on out. After all, inflation is set to hit 4% at the same time wage growth is slowing. This combination will drive real income growth close to zero by the end of the year.
The economy will also still be facing a drag from US tariffs and their associated uncertainty, even if tariffs are not quite as large as we were worried they would be back in April.
Further adding to the challenges facing the UK economy in Q3 and beyond is that another round of tax increases looks almost certain to be on the way. Even if these turn out to be deferred, speculation in the run up to this year’s Autumn Budget won’t help growth.
With that said, we’re only expecting growth to slow to around 0.2% q/q in the second half of this year. Consumers have plenty of room to save a bit less and spend a bit more to offset the dip in real income growth. Increases in total government spending will also continue to be a tailwind for a while yet.
This should be enough to push growth to 1.3% this year and to something similar in 2026. While this is slightly faster than last year, it won’t be enough to keep the UK at the top of the G7’s leaderboard for long.
