UK growth to remain weak amid heightened uncertainty

The UK’s incipient economic recovery in the first half of 2024 has since flagged. After expanding by 0.8% and 0.4% in Q1 and Q2 2024, the economy stagnated in Q3 and expanded by just 0.1% in Q4, before contracting slightly in January 2025.

While the Bank of England forecasts growth of around 0.25% in Q1 2025, it suggests that the 0-0.1% steer from business surveys probably provides a better indication of the economy’s underlying rate of growth.   

October’s Budget and other policies appear to have had a very negative impact on business sentiment.

In the ACCA and IMA quarterly Global Economic Conditions Survey (GECS), confidence among UK accountants fell to its lowest on record in Q4 (see Chart 1), with the proportion of respondents reporting increased operating costs rising towards levels recorded in the aftermath of Russia’s invasion of Ukraine.

Other firms’ surveys have also pointed to material falls in confidence.  

Chart 1: UK Global Economic Conditions Survey (GECS) 

Amid the significant rise in National Insurance Contributions for employers set to take effect from April, as well as another large rise in the National Minimum Wage, there is significant uncertainty about the impact of these changes on business hiring, investment and pricing policies over coming quarters.

There has already been a notable weakening in the employment-related components of some business surveys, raising the risk of a material weakening in the labour market, while firms could also potentially become increasingly cautious in their investment spending.   

Meanwhile, sentiment among consumers is unlikely to be helped by the rise in inflation over coming quarters, with the Bank of England expecting it to increase from 3% in January to around 3.75% in Q3, while higher stamp duty on house purchases from next month may also fuel some softening in the property market.

Moreover, the message to businesses and households from this week’s Spring Statement is likely to be a tough one – with the Chancellor set to announce spending cuts in order to keep meeting her fiscal rules.  

The challenging domestic backdrop is occurring at a time of enormous global uncertainty amid major changes in US trade policy (see Chart 2), with President Trump enacting tariff increases on some trade partners and products and looking set to impose additional ones over coming months.

In addition, there has been a large rise in uncertainty regarding the US’s commitment to its traditional international alliances.

The uncertainty created by the President’s policies also appear to be creating downside risks for the U.S. economy – the main engine of global growth recently.   

Chart 2: US Trade Policy Uncertainty Index* 

Policy will provide some support to the UK economy over coming quarters though, amid the large increases in public sector spending announced in October’s Budget.

Moreover, the Bank of England should continue to gradually reduce the restrictiveness of monetary policy, although stubborn domestic inflationary pressures suggest that a speedy pace of rate cuts is unlikely.

At its March meeting, only one member voted for a rate cut, and financial markets expect only two quarter point interest rate cuts this year.  

All in all, amid a rather challenging domestic and external backdrop, another lacklustre performance seems likely for the UK economy in 2025, with growth likely to struggle to beat last year’s 0.9% pace of expansion.

Unfortunately, there are no quick and easy ways to boost growth, with the Chancellor needing to double-down on measures to boost the economy’s competitiveness over time and hopefully raise its poor productivity performance.

This is absolutely key for the country’s long-term living standards.