OECD Economic Outlook, Volume 2025 Issue 1

United Kingdom

GDP growth is projected to reach 1.3% in 2025 before slowing to 1.0% in 2026, dampened by heightened trade tensions, tighter financial conditions, and elevated uncertainty. Inflationary pressures will initially linger, due to higher import prices and robust wage growth in 2025, but subside over 2026, as spare capacity emerges and the labour market loosens. Substantial debt interest payments will continue to weigh on the fiscal balance and push up public debt.

Fiscal prudence is required as the monetary stance is easing gradually. Efforts to rebuild buffers should be stepped up in the face of strongly constrained budgetary policy and substantial downward risks to growth, while productivity-enhancing public investments should be preserved. Continuing to advance supply‑side priorities is key, including by delivering on the announced planning reform to support investment, as well as on welfare reform and the ongoing extension of childcare support to promote labour supply.

The economy has picked up but faces headwinds

Growth strengthened in the first quarter of 2025, reaching 0.7% on a quarter-to-quarter basis according to the first estimate, up from 0.1% in the last quarter of 2024. Credit to the private sector in March increased at its fastest pace since the third quarter of 2022, reflecting the four 25 basis point cuts in Bank Rate since August 2024. But momentum is weakening, with business sentiment rapidly deteriorating. Consumer confidence remains depressed and has declined since the second half of 2024, while retail sales volumes have been volatile, with an uptick in March. Gilt yields have risen significantly in recent months, partly reflecting global developments. The labour market continues to cool, as falling vacancies are bringing the vacancy-to-unemployment ratio back to pre-pandemic levels. Increases in the national minimum wage, in employer social security contributions, and in utility bills kept services price inflation elevated, at 5.4% in the year to April, and maintained substantial domestic price pressures, with CPI inflation at 3.5% over the same period.

Survey measures of new export orders have plummeted, as the aggregate effective tariff faced by domestic goods exporters in US markets is estimated to have increased by almost 8 percentage points since the beginning of the year. This reflects new tariffs of 10% on cars up to a tariff-rate quota of 100 000 vehicles, and 10% on all other goods exports to the United States apart from exempted items, such as pharmaceutical products and steel and aluminium, as well as the removal of tariffs on beef, up to a duty-free quota of 13 000 metric tonnes. More than a fifth of UK exports are destined for US markets, but less than a third of these are goods, worth about 2% of GDP. Among these, pharmaceutical products account for about a third, while cars and car parts account for about 20%. No retaliatory tariffs have been announced on imports from the United States, and tariffs have been removed on US ethanol up to a duty-free quota of 1.4 billion litres, and on US beef up to a duty-free quota of 13 000 metric tonnes.

United Kingdom 1

1. S&P Global UK Purchasing Manager Indexes; values above 50 indicate expansion.

Source: S&P Global; and Bank of England.

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United Kingdom: Demand, output and prices

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United Kingdom 2

1. Transfers to and from the Bank of England under the Asset Purchase Facility indemnification arrangement.

Source: OECD Economic Outlook 117 database; and Office for Budget Responsibility.

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The fiscal stance is restrictive as monetary easing continues

Bank Rate is projected to be lowered gradually from its current value of 4.25% and reach a terminal value of 3.5% in the second quarter of 2026, as inflation continues to converge towards target and growth slows below potential. The unwinding of the stock of assets held for monetary purposes in the Asset Purchase Facility is assumed to proceed at an unchanged pace, with the GBP 100 billion target for gilt stock reduction over the 12‑month period to September 2025 renewed for another year.

Fiscal tightening will continue, with consolidation of about 1.2% of potential GDP between 2024 and 2026. To comply with its fiscal rules, the government implemented tax and spending adjustments in the spring statement, including cuts to welfare spending on incapacity of GBP 5 billion (slightly under 0.2% of GDP), and other tax measures of GBP 2 billion. Moreover, defence spending will be increased by GBP 7 billion (a little over 0.2% of GDP), fully funded through cuts in overseas aid. The government deficit will improve substantially, from 6.0% of GDP in 2024 to 5.3% in 2025 and 4.5% in 2026, owing to both consolidation and rising tax receipts, as debt interest spending remains high. Public debt is set to continue rising, reaching 104% of GDP in 2026. With the ongoing fiscal consolidation, tax receipts will keep rising to about 37.5% of GDP by fiscal year 2026‑27. Further supply-side reforms, including the overhaul of the National Planning Policy Framework, are expected to increase potential output and could help to lower fiscal pressures in the longer run.

Growth will remain modest while public finances are under pressure

GDP is projected to grow by 1.3% in 2025 and 1.0% in 2026. Adverse effects from heightened trade tensions and uncertainty on business sentiment and consumer confidence will significantly weigh on growth. The drag on external demand, private consumption, and business investment is projected to more than offset the positive effects of last autumn’s budgetary measures on government consumption and investment. Higher import prices will slow the disinflation process in 2025, before the emergence of spare capacity and the loosening of the labour market create downward pressure in 2026. Unemployment is expected to increase moderately to 4.6%.

The state of the public finances is a significant downside risk to the outlook if the fiscal rules are to be met. Currently very thin fiscal buffers could be insufficient to provide adequate support without breaching the fiscal rules in the event of renewed adverse shocks. Elevated services price inflation constitutes another downside risk, as it could require the monetary stance to remain tighter for longer. Relatively high excess savings are an upside risk to private consumption and housing investment.

Continuing to rebuild fiscal buffers and to focus on the supply side is essential

Strengthening the public finances remains a priority, by delivering on the government’s ambitious fiscal plans, including through the upcoming spending review. A balanced approach should combine targeted spending cuts, including closing tax loopholes; revenue-raising measures such as re‑evaluating council tax bands based on updated property values; and the removal of distortions in the tax system. To boost investment and revive productivity growth, it is necessary to deliver on the planned overhaul of the National Planning Policy Framework to unlock infrastructure projects and housing development. To reverse the decline in labour market participation, swiftly implementing pro-work reforms to the welfare state is key, while protecting the most vulnerable. Proceeding with the ongoing reform of childcare support, including by addressing potential bottlenecks and prioritising low-income households if childcare supply falls short of demand, is required to continue promoting female labour market participation.