Our economic outlook for the United Kingdom
February 21, 2025
Our outlook for year-end 2025
0.7%
Economic growth,
year over year
The U.K. economy managed growth of just 0.1% in the fourth quarter of 2024, the Office for National Statistics reported February 13. Having registered no growth in the third quarter, the economy has turned dramatically from the first half of 2024, when it grew by 0.7% and 0.4% in respective quarters. We have downgraded our outlook for 2025 GDP from 1.4% to 0.7%, reflecting base effects from late 2024 and a deterioration in forward-looking data, particularly related to the labor market.
2.7%
Core inflation, year over year
We have upgraded our 2025 forecasts for both headline and core inflation by 0.3 percentage points, given a likely rebound in airfare prices, rising energy and water prices, and weakness in sterling. Further, central bank and other surveys suggest that businesses plan to pass along the costs of higher national insurance contributions to consumers, which would add to inflationary pressures. We now foresee headline inflation ending 2025 at 2.5% year over year, and core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, at 2.7%.
3.75%
Monetary policy rate
The Bank of England (BoE) cut the bank rate by 25 basis points to 4.5% on February 6 but noted the appropriateness of a “gradual and careful approach to the further withdrawal of monetary policy restraint.” Although a stagnating economy and softening labor market could suggest further room to cut the policy rate, the BoE also must consider the prospect of renewed inflation. It increased its 2025 forecast for headline inflation from 2.75% to 3.5%. We expect quarterly rate cuts that would leave the bank rate at 3.75% at year-end. Markets that had expected one to two cuts this year have moved to our view.
4.7%
Unemployment rate
Early signs suggest a deterioration in labor market momentum because of an increase in national insurance contributions. Starting in April, employers face an increase in the contributions, from 13.8% to 15% of wages. Elevated wage growth was already making it more expensive for companies to hire. The unemployment rate held steady at 4.4% in the October through December 2024 period. We have increased our year-end 2025 forecast for the unemployment rate from 4.4% to 4.7% 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.
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