UK QUARTERLY ECONOMIC OUTLOOK | Q3 2025
The UK vs Global economy
UK leading the way, for now…
The UK economy grew almost twice as fast as the US and eurozone in the first half of the year. But, it probably won’t manage to keep the top spot for long.
Global growth will slow this year to 3% according to the IMF. That’s still better than the 2.8% the intergovernmental institution was expecting back in March, but a way short of the 3.3% rate it was forecasting back in January. The revisions are led by the sharp slowdown in US growth from 2.8% in 2024 to a little over 1% in 2025, despite the worst impact of tariffs being mitigated through trade agreements and suspensions.
In Europe, despite the recent trade deal, tariffs will still weigh on growth. However, a huge increase in defence and infrastructure spending over the next decade should help to offset this. While spending 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%.
Relatively higher inflation and interest rates
After slowing at the end of last year, inflation is likely to re-accelerate in the UK and the US, mainly due to policy decisions. Price pressures in the eurozone look much more muted, largely thanks to the recent strength of the euro, which has appreciated over 6% so far this year on a trade-weighted basis. That will leave the Federal Reserve (Fed) in a position that the BoE is more used to being in; namely, an environment of weak growth and high inflation.
Trade uncertainty and rising inflationary pressures have clouded the outlook for the Fed. Nevertheless, financial markets are currently expecting 50bps of cuts over the rest of this year because of the recent deterioration in growth. Meanwhile, the European Central Bank (ECB) and BoE are both probably close to finishing their policy easing cycles.
The big uncertainty remains US economic policy. While the flurry of “trade deals” is a step in the right direction, there is still significant risk of trade disputes re-igniting over the next couple of years as current policy is unlikely to close the US trade deficit. Ultimately, the global economy is entering a period of relatively higher inflation and interest rates, which will continue to put pressure on government budgets as global economic growth remains subdued.
