ECONOMIC OVERVIEW

Growth impacted by uncertainty

Plans for higher public investment and early spending ahead of additional US tariffs encouraged strong Gross Domestic Product (GDP) growth in the UK at the beginning of 2025, with an expansion of 0.7% in Q1 compared to the previous quarter. However, momentum slowed in Q2 to 0.3% and 0.1% in Q3 (Figure 1).

The consensus of forecasters estimates annual GDP growth to slow from 1.5% in 2025 to 1.2% in 2026, with a slight rebound to 1.4% in 2027.

The expectation of tax rises, sticky inflation, and the continued high cost of borrowing undermined both business and consumer confidence in 2025, impacting spending and investment decisions.

Source: Office for National Statistics

A weakening UK jobs market

A loss of economic confidence, paired with the increased cost of employment due to a rise in the minimum wage, changes to the employers’ National Insurance Contributions, and measures introduced in the Employment Rights Bill, has led to a cooling in the general jobs market.

The Office for National Statistics (ONS) revealed a modest decline in employment rate from 75% to 74.9% in the three-months to October and a rise in the unemployment rate to 5.1%, the highest since January 2021. Annual pay growth in the private sector has fallen significantly from 5.5% in Q1 2025 to 4.0% in the three-months to October.

Inflation remains stubbornly high

Consumer Price Inflation (CPI) picked up in 2025 due to higher food and utility prices with November’s annual CPI rate being high at 3.2%, markedly ahead of the Bank of England’s target. Economists surveyed by the Treasury expect inflation to remain elevated through 2026, however it is forecasted to fall to 2.2% in Q4 2026.

This sticky inflation has slowed the pace of Bank Rate cuts by the Bank of England when compared to those seen in 2024 and the first half of 2025. Further rate cuts are expected this year, but growing evidence of a softening labour market, in addition to sluggish economic growth, has divided opinion at the Bank of England’s Monetary Policy Committee, with December’s cut to 3.75% passing by only a narrow margin.

The news that the Bank of England has lowered its estimates of how much capital large UK banks are required to hold is potentially positive. This measure would free up funds for lending, which would benefit commercial and infrastructure projects, as well as for house purchases.

Growth measures lacked in November’s budget

Disappointingly, the Budget contained few measures aimed at stimulating economic growth, focusing instead on balancing the books rather than getting the economy growing.

While the Budget was light on construction investment projects, the UK Chancellor did reveal new funding for the Lower Thames Crossing, alongside backing for nuclear at Sizewell and at Wylfa, and for the DLR extension to Thamesmead.