Our economic outlook for the United Kingdom
January 24, 2025
Our outlook for year-end 2025
1.4%
Economic growth,
year over year
The recent move higher in gilt yields, if sustained, is likely to tighten financial conditions, primarily through more expensive mortgages and reduced business investment, and weigh on growth. Since mid-September, yields have climbed by 80 basis points on 30-year gilts and by 84 basis points on 10-year gilts. The economy stagnated in the third quarter; subsequent data also found zero growth for the three months ended November 30, 2024. Growth in the second quarter had been 0.4%. We continue to expect 2025 GDP growth of around 1.4%, but risks skew to the downside given tightening financial conditions and early signs of cracks in the labor market.
2.4%
Core inflation, year over year
We expect subdued progress, with core inflation falling to a 2.4% pace by the end of 2025. Risks skew to the upside given the prospect of global trade tensions and the potential for employers to pass increased national insurance contributions to the consumer. A persistently weaker pound would likely be inflationary, though perhaps offset by tighter financial conditions.
3.75%
Monetary policy rate
Recent events, taken together, are dovish for the monetary policy outlook. Tighter financial conditions are likely to weigh on economic growth, and the labor market is softening. That said, sustained weakness in the pound could heighten inflation risks and challenge the monetary policy view. We expect quarterly rate cuts in 2025 that would leave the bank rate at a below-consensus 3.75% at year-end. The Monetary Policy Committee (MPC) of the Bank of England maintained the bank rate at 4.75% on December 19. A tighter-than-expected 6-to-3 vote, with the dissenting MPC members preferring a rate cut, underscores a fine balance of risks. Members who voted to maintain the bank rate pointed to increased inflation and wage growth as key risks, while those advocating for a cut cited a risk of inflation “deviating unsustainably” below target amid sluggish demand.
4.4%
Unemployment rate
Small cracks may be appearing in the labor market as elevated wage growth makes it more expensive for companies to hire. Additionally, starting in April employers face an increase in workers’ national insurance contributions, from 13.8% to 15% of wages. The unemployment rate rose to 4.4% from September through November 2024, up from 4.3% in the preceding three-month rolling period. We foresee the unemployment rate ending 2025 around its current levels, with risks skewed to the upside given recent signs of labor market softening.
What I’m watching
An opportunity to bolster economic growth
The United Kingdom has suffered from subdued productivity growth over the last 25 years, lagging its international peers, including the United States. A key driver of this difference is the low level of total investment. For much of the past three decades, the U.K. has had the lowest investment levels in the G7. New policies aimed at directly boosting productivity growth, perhaps through higher private and public sector investment, will be essential to the economy’s long-term prospects.
Josefina Rodriguez,
Vanguard Economist
Decades of underwhelming U.K. productivity growth
Notes: The data reflect quarterly rates of change in the production of goods and services per hour worked from Q1 2000 through Q2 2024.
Source: Vanguard calculations, based on data from the U.K.’s Office for National Statistics and the U.S. Bureau of Labor Statistics.
Note: All investing is subject to risk, including the possible loss of the money you invest.