Economic Outlook

January 2025 Forecast

Stable inflation and 100bps of cuts from Bank of England

We expect inflation to increase due to the anticipated gas price increases, but to peak around 3%. The broadly stable inflationary environment would therefore allow four further cuts from the Bank of England (BoE). We highlighted long rates trending up at the end of 2024 and the threat this posed to private sector demand and property investment.

Mid-year review

• Despite inflation breaching 3%, driven primarily by regulated gas price increases, there has been greater price stability than in recent history. We expect inflation to peak at 3.5% during the summer.
• The BoE has cut rates twice, in February and May, and we now expect three further cuts in line with market expectations.
• Long rates have remained elevated so far this year, which has impacted property investment in the first half of 2025.

January 2025 Forecast

Rising real incomes will boost consumption and growth

Lower inflation and falling interest rates will support real income growth, boosting consumption. Furthermore, increased government spending in areas such as defence, healthcare and housebuilding will help to support GDP growth of 1.8% in 2025.

Mid-year review

• Real household income has fallen slightly due to greater than anticipated increase in inflation and softer labour markets. However, consumption has still improved as retail sales volumes have risen 1.6% since the start of 2025, after a period of stagnation in 2024.
• Government expenditure has increased by 5%, driven by departmental spending and support to local governments. We are yet to see direct investment in key areas outlined in the Autumn budget.
• Due to global uncertainty around trade stunting short-term growth, we have revised our GDP growth outlook down to 1.3% in 2025 and 2026, respectively.

January 2025 Forecast

Increasing business costs will soften labour market

Increases in the Minimum Wage and Employer National Insurance contributions announced in the Autumn Budget will increase business costs, leading to lower wage growth and lower private sector job creation.

Mid-year review

• Since the Autumn Budget announcement both nominal and real wage growth have slowed. Unemployment has increased 30bps to 4.7%, unfilled job vacancies have fallen 8.7%, and the number of payrolled employees has fallen 0.5%.
• We expect the labour market to continue loosening, but we anticipate unemployment will not breach the 5% mark. However, nominal wage growth will continue to moderate as lower inflation and labour market softening feeds through.

Outlook sensitive to downside risks

Consumption will drive economic recovery

We anticipate price stability to be maintained and facilitate three further rate cuts by the BoE. Labour markets will continue to soften and wage growth will slow as businesses continue to adjust to new cost levels. We still expect improved consumption and greater fiscal stimulus to drive growth. Despite not coming down as expected, bond yields have been broadly flat despite global uncertainty and we expect this will continue.

Global uncertainty and risks create headwinds

U.S. trade policy created shockwaves throughout the global economy and stunted activity. Despite the UK reaching a trade deal with the U.S., there remains a 10% tariff on most goods and 25% on exports of steel and aluminium. We anticipate the U.S. Administration to reach trade deals with other major partners, but countries without a deal are subject to reciprocal tariffs as of 1 August. At the time of writing, the U.S. has reached further trade agreements with both the EU and Japan.

Furthermore, the ongoing geopolitical conflicts and potential escalation remains a threat to energy markets and medium-term price stability.

Figure 1: Forecast Changes for 2025, January vs July

Figure 2: UK retail sales volumes, three-month moving average, excluding fuel (2022-25)