April 25, 2025
Our outlook for year-end 2025
Around 0.5%
Economic growth,
year over year
Our estimate puts the U.K.’s effective tariff rate around 7% once trade developments play out. This is materially less than expected for many other nations in the face of U.S. tariffs. We have modestly reduced our 2025 GDP growth forecast to around 0.5%. Our outlook had already reflected a deterioration in forward-looking data, particularly for the labor market. Tax hikes, still-restrictive monetary policy, and a softening external environment are all weighing on demand.
Around 3%
Core inflation, year over year
Inflation is likely to soften in the medium term owing to slowing economic activity. We foresee core inflation falling to around the 2% target set by the Bank of England (BoE) in 2026.
3.75%
Monetary policy rate
The BoE finds itself in a challenging position, with core inflation falling more slowly than expected while the labor market is deteriorating. The Monetary Policy Committee left the bank rate unchanged at 4.5%, the BoE announced on March 20, having cut it by 25 basis points in February. The bank noted that, although it expected inflation to rise into the third quarter, it anticipates a fall-back thereafter. Based on this evolving view, the BoE said, “A gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.” We expect quarterly rate cuts that would leave the bank rate at 3.75% at year-end.
Around 4.8%
Unemployment rate
Employment fell by more than 78,000 in March, ahead of an April increase in employers’ national insurance contributions from 13.8% of wages to 15%. Elevated wage growth was already making it more expensive for companies to hire. Annual growth in private sector regular pay was 5.9% in the December-to-February period, down from 6.1% in the previous three-month rolling period but still significantly above the level consistent with 2% inflation. However, timely measures suggest an easing in wage growth in the coming months. The unemployment rate held steady at 4.4% for the December-through-February period. We foresee the unemployment rate ending the year around 4.8% given recent signs of labor market softening.
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