Oxford Economics predicts UK GDP growth of 1.3% in 2025 and 0.9% in 2026, with growth weakening from mid-2025 due to tighter fiscal policy and delays in lower interest rates. The November Budget plans £30bn in tax rises and limited spending, while persistent inflation and new US tariffs will squeeze household incomes and investment, further dampening economic prospects for the coming year.
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
- Consumers face a squeeze. OE forecasts real income growth slowing to 0.6% in 2026.
- Fiscal policy is tightening. November Budget to tighten policy by about £30bn.
- Employment and pay are under pressure. Unemployment predicted to reach 5% next year.
- Monetary policy will ease cautiously. The base rate forecast to end 2026 at 3.5%.
- External conditions are weak. US tariffs now affect around 5% of UK exports.
What to watch out for
- Further fiscal changes. November Budget will be more comprehensive.
- 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.
- 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
