Our economic outlook for the United Kingdom

An improved global outlook and greater-than-expected growth in the first quarter have led us to raise our forecast for full-year GDP growth to just above 1% from around 0.5%. Progress in U.S.-U.K. and U.S.-China trade relations underpin the more optimistic global view. First-quarter growth of 0.7% was driven by net exports and business investment, suggesting frontloading ahead of U.S. tariffs. We expect materially softer growth in the second quarter as an aftereffect of the frontloading and amid continued trade uncertainty.

Core inflation remains elevated, with little progress made on services inflation or wage growth in recent months. That said, employment growth has softened materially, partly due to the government’s decision in October 2024 to raise taxes for employers. Surveys point to some labor-market deterioration ahead. Expectations of further fiscal tightening and long-term inflation expectations that remain well anchored are likely to give the Bank of England (BoE) conviction that inflationary pressures will subside.

We continue to expect the BoE to cut the bank rate by 25 basis points each in the third and fourth quarters. That would leave the policy rate at 3.75% at year-end, a touch above our assessment of the neutral rate, or the policy rate that would neither stimulate nor inhibit growth.