UK economic growth forecasts downgraded in blow for Reeves

Stagnant growth late last year means the UK economy will improve slower than previously predicted in 2025, according to new forecasts.

The EY Item Club economic forecaster has become the latest influential group to cut its predictions amid continued pressure on businesses, which face further tax and wage rises in April.

It represents another blow to chancellor Rachel Reeves’s hopes to rapidly grow the UK economy in order to help support the Labour government’s spending plans.

The UK gross domestic product (GDP) is expected to grow by 1 per cent in 2025, according to EY’s winter forecasts.

It had previously predicted 1.5 per cent growth for the year. The forecasts also pointed to 0.8 per cent growth across the economy last year, suggesting only a slight acceleration in economic growth.

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It comes after a weaker second half of 2024, with a worse-than-expected 0.1 per cent rise in GDP in November and a 0.1 per cent monthly decline in October.

The economy had flatlined over the third quarter of the year. The UK is expected to see stronger growth next year, with the forecasts indicating it could see a 1.6 per cent rise in 2026.

Last week, Reeves delivered a wide-ranging speech detailing Labour’s plans to promote new developments across the UK.

Pledging projects which aim regenerate areas from north to south, the chancellor aimed to promote a central message of economic growth.

Anna Anthony, EY UK regional managing partner, said: “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.

“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. While business investment is set to increase, tightening financial conditions and global trade uncertainty are expected to weigh on private sector confidence in the first half of this year.”

The research indicated however that household confidence is set to improve, with consumer spending predicted to rise by 1.6 per cent for the year.

However, it comes amid continued inflationary pressure with Consumer Price Index (CPI) inflation set to stay above the 2 per cent target rate for the year, averaging at 2.8 per cent.

It said that this inflationary pressure will be partly linked to firms impacted by higher employer national insurance contributions (NICs) passing some cost onto customers.

EY suggested that persistent inflation will lead to one interest rate cut per quarter this year, with UK interest rates due to reach 3.75 per cent by the end of 2025.