Our economic outlook for the United Kingdom
December 05, 2024
Our outlook for year-end 2025
1.4%
Economic growth,
year over year
The U.K. economy recovered in 2024, though growth has been uninspiring. We expect above-trend growth in 2025, driven by fiscal stimulus. Much of the spending in the autumn budget announced in October 2024 is expected to be realized in 2025 and 2026.
2.4%
Core inflation, year over year
We expect progress on inflation to be slower in 2025. Services inflation remains elevated and is more stubborn, and fiscal easing would be expected to support demand. The potential for global trade tensions to intensity increases inflationary risks as well.
3.75%
Monetary policy rate
We expect the Bank of England to continue lowering interest rates in 2025, but at a gradual pace. Expect the bank rate to end 2025 at 3.75%. That would remain above our estimate of a 3%–3.5% neutral rate for the U.K. (The neutral rate is a theoretical policy interest rate that would neither stimulate nor restrict an economy.)
4.4%
Unemployment rate
We expect productivity growth to recover over the next two years to a rate similar to the average since 2010, helped by the extra public investment announced in the autumn budget. However, this would still be lower than the productivity growth seen in the millennium’s first decade. We expect labor supply growth in 2025 and 2026 to remain broadly similar to the figures from 2023 and 2024.
What I’m watching
An opportunity to bolster economic growth
The United Kingdom has suffered from subdued productivity growth over the last 25 years, lagging its international peers, including the United States. A key driver of this difference is the low level of total investment. For much of the past three decades, the U.K. has had the lowest investment levels in the G7. New policies aimed at directly boosting productivity growth, perhaps through higher private and public sector investment, will be essential to the economy’s long-term prospects.
Josefina Rodriguez,
Vanguard Economist
Decades of underwhelming U.K. productivity growth
Notes: The data reflect quarterly rates of change in the production of goods and services per hour worked from Q1 2000 through Q2 2024.
Source: Vanguard calculations, based on data from the U.K.’s Office for National Statistics and the U.S. Bureau of Labor Statistics.
Note: All investing is subject to risk, including the possible loss of the money you invest.