UK Economy Outlook for 2025: Slower Growth Ahead

Deutsche Bank has adjusted its economic forecasts for the UK, signaling a slower growth trajectory in 2025. The latest projections, released Tuesday, predict a GDP growth rate of 1.3% in 2025 and 1.4% in 2026, both revised down by 0.2 percentage points from previous estimates. Factors influencing this downgrade include weaker private sector demand, rising payroll costs, and subdued employment growth.

UK Labor Market: Unemployment and Wage Growth Trends

The UK labor market is expected to experience further softening, with Deutsche Bank forecasting the unemployment rate to peak at 4.6% by late spring 2025. This increase is attributed to declining job vacancies and higher employer costs, partly due to rising National Insurance Contributions (NICs).

Wage growth is also projected to decelerate:

• 2024: Average pay settlements at 5.5%.
• 2025: Wage growth slowing to 3.75%-4%.
• 2026: Further decline to 3%-3.25%.

Inflation Outlook: Persistent Pressures Through 2026

Deutsche Bank expects inflation to remain a challenge, with the Consumer Price Index (CPI) climbing to 2.9% by 2026, up from an anticipated 2.5% in 2024. Despite this, the bank maintains that inflation will eventually align with the Bank of England's 2% target by the end of 2026.

Fiscal and Monetary Policy Adjustments

The UK’s fiscal policy is likely to remain tight, as outlined in the upcoming Spring Statement. Reduced medium-term spending plans and delays in the multi-year spending review may prompt the government to explore additional borrowing or minor tax changes.

On the monetary policy front, Deutsche Bank predicts a more measured approach to interest rate cuts. The Bank of England is expected to reduce rates four times instead of five in 2025, with the first cut likely in the year’s first half. Rates are projected to reach 3.25% by Q1 2026, reflecting a cautious easing strategy.

Housing Market and Trade Projections

The housing market shows resilience, with Deutsche Bank forecasting house price growth of 2.75% in 2025, driven by favorable credit conditions and steady consumer demand. However, the UK’s trade outlook remains uncertain, facing potential headwinds from global challenges, including possible tariff escalations under a newly elected US administration.

Key Takeaways:

• GDP Growth: Revised to 1.3% for 2025 and 1.4% for 2026.
• Labor Market: Unemployment to peak at 4.6%; wage growth to slow significantly.
• Inflation: CPI to rise to 2.9% by 2026 but align with the BoE's target by year-end.
• Monetary Policy: Slower pace of rate cuts, with rates reaching 3.25% by early 2026.
• Housing: Steady growth in house prices, up 2.75% in 2025.
• Trade: Potential global uncertainties may impact export performance.

This comprehensive analysis highlights a challenging but manageable economic path for the UK in 2025, emphasising the need for strategic fiscal and monetary policies to navigate growth constraints and inflationary pressures.

(Sources: investing.com, reuters.com)