UK economic growth forecasts downgraded in new blow to under pressure chancellor

The UK's economic growth is set to be slower than previously anticipated in 2025, with new forecasts suggesting a less optimistic outlook. The EY Item Club, a respected economic forecaster, has reduced their growth predictions as businesses continue to grapple with upcoming tax and wage increases in April. This comes as a further setback to Chancellor Rachel Reeves' ambitions to swiftly expand the UK economy, which is integral to funding the Labour Government’s spending initiatives.

According to EY's winter forecasts, the UK gross domestic product (GDP) is now expected to see a modest increase of 1% in 2025, down from an earlier projection of 1.5%. The revised forecasts also indicate that the economy grew by just 0.8% last year, hinting at only a marginal uptick in economic activity. This follows a disappointing second half of 2024, marked by a weaker-than-anticipated GDP rise of 0.1% in November and a 0.1% monthly contraction in October, after the economy had already stalled during the third quarter.

Despite this, there is some optimism for the future, with predictions of stronger growth in the following year; the UK could potentially experience a 1.6% increase in 2026. Anna Anthony, EY UK regional managing partner, commented: "Despite the subdued finish to 2024, there are signs that the UK economy could turn a corner and achieve stronger levels of growth this year.". The latest financial forecast brings a glimmer of hope, suggesting that consumer confidence should see an uptick as real wages are expected to rise, potentially easing the financial strain on many households by the end of 2025. The report states: "Following a prolonged period of financial uncertainty, we should start to see an improvement in consumer confidence as real wages continue to increase, with many households feeling less of a financial squeeze by the end of 2025.The outlook for UK business is more of a mixed picture.".

It acknowledges that while business investment may be on the upswing, factors such as tightening financial conditions and global trade uncertainties could dampen private sector confidence in the early months of this year. The research also indicates a positive shift in household confidence, with consumer spending projected to climb by 1.6% over the course of the year. Yet, this comes against a backdrop of persistent inflationary pressures, with the Consumer Price Index (CPI) inflation expected to remain above the Bank of England's 2% target rate throughout the year, averaging at 2.8%.

The report suggests that this inflationary pressure will be partly due to companies affected by increased employer national insurance contributions (NICs) passing some of these costs onto their customers. According to EY, the enduring inflation is likely to trigger a series of interest rate cuts, one per quarter, leading to UK interest rates settling at 3.75% by the close of 2025. Get our money-saving tips and top offers direct to your inbox with the Mirror Money newsletter.