Britain’s growth outlook has been slashed for 2025 as the economy struggles with tax hikes, high borrowing costs and a slump in business confidence.
The UK’s GDP will grow by just 1pc this year, according to the EY Item Club, down from previous forecasts of 1.5pc after the economy ground to a halt over winter.
Much of the blame has been pinned on the Chancellor’s record tax-raising Budget in October, as EY said an increase in employer National Insurance contributions and the minimum wage will damage investment and push up unemployment to 4.6pc.
Only falling interest rates and a boost in household spending will break the economy’s current stagnation, said Matt Swannell, chief economic advisor to the EY Item Club.
“A weaker-than-expected finish to 2024 left the UK economy with a greater hill to climb to achieve moderate growth this year, and GDP will likely struggle to accelerate beyond 1pc in 2025,” he said. “Nonetheless, the slowdown at the end of last year is expected to be temporary and the UK should see steady quarter-on-quarter growth throughout 2025.”
The UK is attempting to kickstart its economy as Donald Trump threatens to unleash a global trade war.
While Britain is not as heavily exposed to US tariffs as other economies, such as China, Mexico and the EU, the potential fallout from a trade war remains “a big risk”, said Mr Swannell.
“We have to see how things play out in terms of how Mr Trump imposes his tariffs and how countries react to them,” he said last night, referring to the President’s decision to impose a wave of import duties on Canada, China and Mexico over the weekend.
“While it may be relatively small for the UK as a whole, some sectors may feel it more sharply than others. We don’t really know what the full tariff schedule will look like over the coming year.
“One of the lessons of the last two years is that supply chains are interlinked and fully determining how these interlinkages play out is one of the key determinants of the economic consequences.”
However, a second threat to the economy is domestic, as the Chancellor may be forced to scale back spending or raise taxes again if the Office for Budget Responsibility determines that the recent rise in borrowing costs puts Ms Reeves at risk of breaking her fiscal rules.
Weaker growth could also impact her borrowing targets, as a slower economy would be expected to generate less tax revenue for the Government.
The latest downgrade comes after business confidence plunged in the wake of October’s Budget. This will lead to investment growing by just 2pc this year, according to EY, down from 3pc in 2024. It will then slow again to 1.8pc in 2026.
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