The UK economy is projected to grow by a modest 1% in 2025, with economists forecasting two interest rate cuts by the Bank of England later in the year. This growth estimate remains largely unchanged despite the uncertainty surrounding tariffs.
The forecast, based on a poll of 52 economists conducted between June 5-10, shows a slight acceleration in growth next year, predicting a 1.2% increase for 2026, compared to 1.1% in 2024.
Slowdown in Economic Growth Expected
The UK’s economic performance has shown mixed results so far in 2025. While the economy grew by 0.7% in the first quarter of the year, this pace is expected to slow down, with just a 0.1% growth in the second quarter and 0.2% growth in the third quarter.
However, economists predict a slight rebound with a 0.3% increase in the final quarter of the year. Despite these fluctuations, the overall growth forecast for the year remains stable, largely due to the modest impact of tariffs on the UK economy.
Impact of Tariffs and Trade Agreements
The ongoing tariff uncertainties, particularly with the U.S., have raised concerns but are not expected to significantly affect the overall UK economy. Specific industries, including the car industry, steel, and pharmaceuticals, may be more vulnerable, but the UK’s goods exports to the U.S. account for only about 2% of GDP.
This relatively small share means that the tariff impact will be limited, according to James Smith, an economist at ING.
The UK remains the only major economy that has secured a trade deal with the U.S., which currently exempts the country from President Donald Trump’s increased tariffs on steel and aluminum imports. However, the 10% goods levy on UK products remains in place, continuing to create some uncertainty in the trade relationship.
Bank of England’s Interest Rate Decisions
The Bank of England is expected to keep its current Bank Rate on hold at 4.25% next week, but economists forecast a quarter-point rate cut in August, followed by another rate reduction in the final months of the year, bringing the rate down to 3.75%.
The Bank’s decisions will be influenced by recent data, which showed a slight rise in unemployment and a slowdown in wage inflation. These signs of a weaker economy may prompt the Bank of England to take a more cautious approach to monetary policy.
Elizabeth Martins, Senior UK Economist at HSBC, pointed out that the recent data on weak jobs and slower pay growth may encourage the Bank to opt for an August rate cut, with market expectations for such a move increasing.
Inflation Outlook
While the economy shows signs of slowing down, inflation is expected to remain elevated in the near term. According to the survey, inflation is forecast to average 3.4% this quarter and 3.3% in the next, before easing below 3.0% in early 2026.
The persistent inflation levels are expected to keep the Bank of England on alert as it navigates the challenges of balancing economic growth and price stability.
Overall, the UK’s economic outlook for 2025 remains cautious, with moderate growth expected. The Bank of England’s interest rate cuts could provide some relief to the economy, but the ongoing challenges of tariffs and inflation will continue to impact the nation’s economic performance.
The central bank’s decisions will likely be shaped by the latest economic data, and future forecasts suggest a gradual easing of monetary policy to support growth.
