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Will the UK economy recover in 2025? Will interest rates continue to fall? Will US trade tariffs affect UK businesses? Investec’s UK Chief Economist Philip Shaw shares five predictions for the year ahead.
Key predictions
1.5%
UK GDP growth
3.75%
UK Bank rate by end of 2025
c.2%
UK inflation by end of 2025
1.28
GBP/USD by end of 2025
1.25
GBP/EUR by end of 2025
UK GDP growth downgraded, but only slightly
- We have downgraded our UK growth forecast, but only slightly, to 1.5% in 2025.
- The October Budget loosened fiscal policy as the government increased spending.
- Employers have warned of lower job creation due to National Insurance Contributions and minimum wage increases.
- Personal finances are still strong, in Q2 2024 there was 3.5% growth in average disposable income year-on-year. The household saving ratio of 10% stood at more than double pre-Covid levels.
UK inflation could rise next year, but should subside quite quickly
- UK inflation could creep up to 3%, principally due to rising gas prices.
- Inflation should fall back close to 2% in Q4 as service sector inflation should continue easing.
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UK interest rates should fall, along with mortgage rates
- The Monetary Policy Committee looks set to continue to reduce interest rates gradually.
- We still expect 100 basis points of rate cuts over 2025, taking the Bank of England Bank rate to 3.75% by the end of the year.
- This is a lower profile for rates than markets are pricing in, which should allow mortgage rates to come down.
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We expect a firmer US dollar, but a weaker euro
- We have lowered our forecast for sterling against the dollar as we expect the US Federal Reserve to cut US interest rates just once in 2025.
- Sterling could move higher against the euro as a weaker Eurozone GDP could see the European Central Bank cut rates to 1.5% by the end of the year.
- We still see upside possibilities for sterling, providing government policies to boost longer-term growth bear fruit.
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The impact of US tariffs on UK businesses might be limited
- While there is some uncertainty, President-elect Donald Trump could introduce tariffs of 10% on goods imported into the US.
- Goods account for 45% of total UK exports and 15% of UK GDP.
- 15% of goods exported go to the US.
- Retaliatory measures to tariffs are likely to be symbolic, to avoid boosting domestic inflation.
