Oxford Economics (OE), has raised its 2025 growth forecast by 0.2ppts to 1.5%, reflecting national accounts revisions that suggest the economy carried stronger momentum into this year. However, OE still expects growth to slow to 0.9% in 2026 and 1.3% in 2027 as domestic headwinds intensify, including tighter fiscal policy and the lagged impact of past interest rate rises.
Excess savings run-down
Consumers across advanced economies run down a significant proportion of the savings they accumulated during the pandemic. The result is a strong consumer-led global recovery, with global GDP rising 1.1 percentage points above the baseline prediction in 2025.
Higher for longer interest rates
Under this downside scenario, a sustained period of high interest rates weighs on stock markets and house prices, resulting in tighter credit conditions and several years of subdued growth. The global economy would slow, growing by only 1.3% in 2024 and 2025, significantly below the baseline forecast.
Increased China-Taiwan tensions
This scenario sees the global recovery falter as fears of conflict hit sentiment at the same time as Taiwan and its allies raise trade and technological barriers against China. Under this scenario, world GDP would grow by only 1.2% in 2024, significantly below the baseline prediction.
Middle East escalation
This downside scenario envisages an escalation of the Israel-Hamas war, leading to disruption to the global oil supply and a sharp spike in prices, which would in turn lead central banks to tighten monetary policy. Global GDP in 2024 would grow by 1.3%, below the baseline forecast of over 2%.
Key drivers of the short-term outlook
- Fiscal policy is tightening. Tax rises account for bulk of the tightening.
- Employment and pay are under pressure. Unemployment predicted to reach 5% next year.
- Consumers face a squeeze. OE predicts real income growth to slow to 0.5% in 2026.
- Monetary policy will ease cautiously. The base rate forecast to end 2026 at 3.5%.
- External conditions are weak. Most corporate debt is on floating or short-term fixed rates.
What to watch out for
- Further fiscal changes. OE predicts that a tightening of £20-£25 billion is needed.
- Planning reforms. The government wants to boost growth.
- US trade policy. The UK-US trade deal 10% minimum tariff on many UK exports to the US. However, this remains unstable.
- Impact of April's NICs and National Living Wage rises mean high minimum wages and NI increasing.
Produced by the Foresight Factory for the IPA Commercial Group
