Press release
03 Feb 2025  | London, GB

UK economic growth downgraded after weaker-than-expected end to 2024

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  • The EY ITEM Club Winter Forecast predicts UK GDP growth of 1% in 2025, down from the 1.5% growth projected in October’s EY ITEM Club Autumn Forecast
  • But slowdown towards the end of 2024 expected to be temporary and steady quarter-on-quarter growth is predicted this year 
  • Consumer spending is forecast to grow by 1.6%, up from the 1% observed in 2024 

A weaker-than-expected end to 2024 means that UK economic growth in 2025 will be slower than previously predicted, according to the EY ITEM Club Winter Forecast.

EY ITEM Club Winter Forecast - February 2025

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

The EY ITEM Club has downgraded its GDP growth expectations for 2025 to 1%, down from the 1.5% predicted in October’s Autumn Forecast, reflecting the stagnation in growth the economy experienced in the second half of 2024. This represents only a marginal improvement on the 0.8% GDP growth the UK economy likely achieved in 2024. 

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.

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.”

UK inflation persists but growing confidence is set to prompt greater consumer spending

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.

Consumer spending is forecast to rise by 1.6% in 2025 as household caution eases. While real income growth is set to slow from the rates seen in previous years, falling interest rates and a growing confidence in the UK economic outlook should offset this by prompting consumers to save less and spend more.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “A weaker-than-expected finish to 2024 left the UK economy with a greater hill to climb to achieve moderate growth this year, and GDP will likely struggle to accelerate beyond 1% in 2025. Nonetheless, the slowdown at the end of last year is expected to be temporary and the UK should see steady quarter-on-quarter growth throughout 2025. 

“However, the easier progress on inflation has now been made and the harder work of navigating sticky domestic inflation will prove more difficult. Inflation is forecast to remain above the 2% target through much of 2025 as the effects of previous falls in energy and goods prices begin to wane. The labour market has loosened in recent months but the upcoming rise in employers’ National Insurance Contributions (NICs) will mean businesses continue to face elevated labour costs, even as pay growth slows.” 

Business investment slows as uncertainty weighs on growth 

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. 

UK house prices to see modest growth in 2025, while unemployment is set to rise

The Winter Forecast predicts a modest rise in the unemployment rate to 4.6% this year as businesses navigate the effects of a 6.7% increase to the National Living Wage and rising employer National Insurance Contributions, which will both come into force from April 2025. However, this should prove temporary and unemployment is forecast to fall back to 4.4% in 2026. 

Elsewhere, the forecast points to an improved outlook for homeowners as housing market transactions and prices are expected to grow through the first quarter of 2025 ahead of Stamp Duty thresholds returning to normal in March. The housing market is likely to see a more gradual improvement in activity levels later in 2025 as the Bank Rate is reduced at a steady pace.

Overall, the EY ITEM Club expects to see a 3.4% increase in house prices in 2025, up from expectations of 1.7% in the Autumn Forecast, and 3.1% growth in 2026, up from the previous projection of 2.1%.

Risks to the forecast

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.

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