UK Economy Forecasted to Grow by 1.5% in 2025 Amid Fiscal Stimulus and Challenges

The UK economy is projected to expand by 1.5% in 2025, a notable improvement from the 0.9% growth recorded last year, according to analysts at UBS. In their latest report, they attributed this expected rebound to a “less contractionary fiscal policy,” which could provide the British economy with significant momentum.

However, challenges persist for the private sector, as elevated taxes, borrowing costs, and wage pressures weigh on businesses. Official data released in December revealed that the UK economy stagnated during the third quarter of 2024, with the Office for National Statistics revising GDP growth for the period to 0.0%, down from an earlier estimate of 0.1%. This marked a lackluster start for Prime Minister Keir Starmer’s administration, which assumed office in July 2024.

Starmer’s government has introduced higher corporate taxes, sparking concerns across the business community, particularly in the manufacturing sector. UBS analysts highlighted that sentiment in the sector has continued to decline as companies brace for steeper tax increases.

The Bank of England has also expressed a cautious outlook, forecasting no growth for the UK economy in the final quarter of 2024. While the central bank opted to keep interest rates unchanged, inflationary pressures remain a key concern.

Despite these headwinds, UBS analysts are optimistic that the “recent slump” in economic activity will not persist. They pointed to public spending plans announced in the UK’s latest budget by Prime Minister Starmer and Finance Minister Rachel Reeves in late October. The fiscal stimulus included in the budget is expected to add an estimated 0.5% to GDP in 2025, as forecasted by the Office for Budget Responsibility.

However, the budget has underscored the fragile state of the UK’s public finances. UBS analysts warned that the decision to boost spending while only partially offsetting it with higher taxes has amplified concerns over fiscal sustainability. Although the spending measures may provide short-term economic relief, the long-term health of the UK’s public purse remains precarious.