UK QUARTERLY ECONOMIC OUTLOOK | Q3 2025
Economic outlook
UK economic growth tails off in Q3
The UK economy has proved resilient to the double whammy of tax and tariff increases in April, growing by 1.1% in the first half of the year alone. However, growth is unlikely to be able to maintain that rapid pace in the second half of the year. Consumers and businesses remain cautious, tariffs will continue to drag on global growth and government spending, which has been a key source of growth, will level out.
This means we’ll probably slip from an average growth rate of 0.5% a quarter in the first half of the year to closer to an average of 0.2% in the second half. But, that still would mean annual growth of 1.3% and, for once, the risks are weighted to the upside.
Why 0.3% isn’t as slow as it sounds
The economy expanded by 0.3% q/q in Q2. That was a sharp slowdown from the 0.7% growth in Q1, but it was also much better than the 0.1% growth that the BoE had expected. While 0.3% might not sound like much, there are two reasons why it’s actually much better than it sounds.
First, we’ve got to take into account “awful April” and all its tariffs and tax increases. Firms and households brought activity, such as exports to the US and house purchases, forward ahead of April, which made Q1 look stronger than it really was. Similarly, the payback from Q1’s rush of activity was that it made Q2 look weaker than it really was. When we average out Q1 and Q2, quarterly growth was about half a percent, meaning the economy grew by a shade over 1% in the first half of the year.
Second, 0.3% isn’t that far off the UK’s potential growth rate. This is how fast the UK can grow without generating excess inflation. The UK’s economic speed limit is probably around 1.5% a year or 0.4% a quarter. So, 0.3% a quarter is only a little below the speed limit and growth in the first half of the year was actually a little faster than it.
Tariff threat eased, but growth still to slow
Growth will probably slow in the second half of the year to around 0.2% q/q on average as US tariffs restrain global demand and April’s increase in employment taxes continue to dampen growth. The biggest question, though, is whether consumers will start spending again.
The US–UK “trade deal”, which limited tariffs on most UK goods to 10%, removes some of the drag on growth from US tariffs. What’s more, a series of other US trade deals, especially with the EU, will limit the damage to global growth. Indeed, the International Monetary Fund (IMF) has revised its global growth forecast for this year up from 2.8% to 3%. However, this is still well below the 3.3% it was predicting in January. Ultimately, US tariffs will still be a drag on UK growth this year, even if not quite to the extent expected in April.
Consumers and the vibecession
More important for the UK economy, though, is the consumer spending forecast. The outlook here has deteriorated a little since April.
With the unemployment rate set to rise to about 5%, a weakening labour market will weigh on total household incomes. A wage-growth slowdown combined with a rise in inflation will also mean real wage growth drops close to zero by the end of the year.
However, in aggregate terms, real household disposable income – the best measure of consumers’ ability to spend – is now 6% above its pre-pandemic peak. What’s more, the household saving ratio has soared to around 11% – about the same as in 2009 in the wake of the Global Financial Crisis. In theory at least, this means consumers could afford to save a bit less and spend a bit more. It would only take a slight drop in the savings rate to get consumer spending growth of over 1% this year and closer to 2% in 2026, which would help aggregate demand.
We think this could happen as the impact of lower interest rates feeds through and consumer confidence ticks up. This assumes, of course, that another round of tax increases in this autumn’s budget doesn’t further dent household incomes and consumer confidence.
So, on balance, the domestic UK economy is in better shape than it perhaps feels as businesses and consumers. However, economic growth is likely to slow over the second half of the year compared to the first.
