The EY ITEM Club Winter Forecast is predicting that UK GDP growth will be at 1% in 2025, down from the 1.5% growth projected in October’s forecast. This represents only a marginal improvement on the 0.8% GDP growth the UK economy likely achieved in 2024.

However, the EY ITEM Club still expects steady quarter-on-quarter growth this year, as interest rates are gradually cut and increased consumer confidence will lead to greater levels of household spending.

UK GDP growth is then expected to accelerate to 1.6% in 2026, in line with predictions made by the EY ITEM Club in October.

According to the Winter Forecast, headline inflation will rise further above the 2% target in 2025 and will only return to 2% at the halfway point of 2026. Consumer Price Index (CPI) inflation is forecast to average 2.8% in 2025 as the drag from falling energy prices recedes and companies pass some of the cost of higher employer National Insurance Contributions (NICs) onto consumers.

Persistent inflation, balanced against the Monetary Policy Committee’s wariness of the national growth outlook and potential fragility in the labour market, should mean that the gradual pace of cuts to the Bank Rate continues through 2025. The EY ITEM Club expects one cut of 25 basis points to be made per quarter, with the Bank Rate reaching 3.75% by the end of 2025.

The EY ITEM Club predicts that the Bank Rate will be cut to 3.5% in February 2026, where it is then expected to remain for a sustained period.

Business investment is expected to grow by 2% in 2025, although this is a downgrade from the 3% predicted in the Autumn Forecast and represents a relatively slow rate of growth following a weak start to the year. Recent tightening in financial conditions, elevated labour costs and heightened levels of corporate uncertainty are all expected to weigh on business investment decisions, even as falling interest rates lower debt servicing costs.

Growth in business investment is then expected to fall to 1.8% in 2026.

The potential impacts of ongoing geopolitical tensions, global trade uncertainty and further consolidation if UK fiscal headroom was to narrow further, including tax rises or spending decisions, all represent downside risks to the Forecast.

For the Bank Rate outlook specifically, the majority of the MPC have suggested that they will likely proceed with caution as they monitor the implications of changes to employers’ NICs and global trade policy for growth and inflation, representing a risk to the Forecast. However, the risk is skewed more towards the upside, with a faster pace of rate cuts the more likely deviation.

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. This should, in turn, provide further support to UK growth.

“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. As economic momentum starts to build, the Government will likely have more opportunities to bolster business confidence and reinforce the UK’s attractiveness as a destination for investment.”

Source:  Credit Connect