OE has lowered its 2025 UK GDP forecast from 1.2% to 1.1% following a larger-than-expected 0.3% drop in April output. OE sees this as “payback” for Q1’s unexpectedly strong growth, rather than the start of a sharper downturn. However, underlying growth momentum remains weak, and OE continues to expect a slowdown from Q2 onwards – continuing a pattern of strong H1s followed by weaker H2s. Business sentiment also remains fragile, dipping in April in response to US trade developments, before stabilizing slightly in May and June. OE forecasts growth to slow further to 0.9% in 2026.
Economic growth
The UK economy grew by 0.7% in Q1 but fell by 0.3% in the month to April. OE continues to believe that GDP data is affected from "residual seasonality", with stronger momentum in H1 of each year being followed by an abrupt slowdown in Q3 – a pattern observed in both 2023 and 2024. We could see a similar pattern in 2025.
Inflation
According to the ONS, the largest downward contribution to the monthly change in CPI annual rates came from transport. The largest upward contributions came from food, and furniture and household goods. Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.5% in the 12 months to May, down from 3.8% in March.
Unemployment
Unemployment was 4.6% in the three months to April, up from 4.4% in the previous three-month quarter. The estimated number of vacancies in the UK fell by 63,000, or 7.9%, on the quarter, to 736,000 in March to May 2025 – the 35th consecutive quarterly decline.
Earnings
From February to April, average weekly regular earnings (excluding bonuses) grew by 5.2% compared to the same period in the previous year (down from 5.5%).
Key drivers of the short-term outlook
- US tariffs will drag on UK exports and business investment.
- Fiscal policy is tightening.
- The Bank Rate will end the year at 3.75%.
- Higher employer taxes will slow job and pay growth.
- Real income growth will slow to 1.1% in 2025 and 0.9% in 2026, from 4% in 2024.
- Borrowers will face higher costs despite falling rates.
What to watch out for
- Further fiscal tightening.
- Planning reforms.
- US trade policy.
- Labour market changes.
Produced by the Foresight Factory for the IPA Commercial Group
