Our economic outlook for the United Kingdom
March 21, 2025
Our outlook for year-end 2025
0.7%
Economic growth,
year over year
The U.K. economy managed growth of just 0.1% in the fourth quarter of 2024, the Office for National Statistics reported February 13. Having registered no growth in the third quarter, the economy has turned dramatically from the first half of 2024, when it grew by 0.7% and 0.4% in respective quarters. We recently downgraded our outlook for 2025 GDP from 1.4% to 0.7%, reflecting base effects from late 2024 and a deterioration in forward-looking data, particularly related to the labor market.
2.7%
Core inflation, year over year
Faster services inflation fueled an increase in the pace of core inflation in January. Core prices, which exclude volatile food, energy, alcohol, and tobacco, rose by 3.7% year over year in January, up from 3.2% in December. Headline inflation was 3% year over year in January, up from 2.5% in December. We expect headline inflation to rise toward 3.5% in the near term amid higher energy prices, but to fall toward 2.5% by year-end. We foresee core inflation falling to around 2.7% by year-end.
3.75%
Monetary policy rate
The Bank of England 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 March 20, having cut it by 25 basis points on February 6. The bank noted that, although it expected inflation to rise into the third quarter, it expects it to fall back thereafter. It said that, based on this evolving view, “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 a below-consensus 3.75% at year-end.
4.7%
Unemployment rate
Deterioration in hard labor market data is showing signs of slowing. The labor market had lost momentum 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. The unemployment rate held steady at 4.4% for the November-through-January period. Annual growth in private sector regular pay was 6.1% in the period, down slightly from 6.2% for the previous three-month rolling period. However, timely measures suggest an easing in wage growth in the coming months. We foresee the unemployment rate ending the year around 4.7% given recent signs of labor market softening.
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.
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