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.