Our economic outlook for the United Kingdom
June 25, 2025
Softening labor market paves the way for more rate cuts
“A softening labor market and further fiscal policy tightening are likely to persuade the Bank of England that inflationary pressures will soon subside.”
Shaan Raithatha,
Vanguard Senior Economist
We continue to expect GDP growth of around 1% in 2025 and 2026. Relative to our expectations at the start of the year, activity was stronger than anticipated in the first quarter. However, this was likely driven by exporters frontloading orders. We expect slower growth from the second quarter onward, both as a subsequent effect of the initial frontloading and because of lower demand as uncertainty weighs on household and corporate spending.
Employment growth is softening materially, due partly to the government raising taxes for employers as of April 6, 2025. Forward-looking surveys on both economic activity and the labor market point to deterioration ahead. With the labor market and wage inflation showing signs of cooling, services inflation is likely to soon follow suit.
Services disinflation, coupled with an expectation that fiscal policy will be tightened further in the autumn budget, will give the Bank of England (BoE) conviction that inflationary pressures will subside despite current stickiness. We continue to expect the BoE to maintain a quarterly cadence of monetary policy easing that would put the bank rate at 3.75% at the end of 2025.
United Kingdom economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December 2025. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
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