- An uncertain trading environment and a rising tax burden pose downside risks to UK economic growth this year.
- While healthy household saving buffers and strong public spending should support economic performance in 2025, the imposition of tariffs could reduce UK GDP growth to 0.8% in both 2025 and 2026.
- Inflation is expected to rise in the near term as firms respond to the increase in labour costs and energy prices rise, before returning to the Bank of England’s target of 2% by mid 2026.
- Interest rates are expected to remain above the neutral rate while the Monetary Policy Committee (MPC) gradually eases monetary policy, with three more cuts pencilled in for 2025 and additional two cuts in 2026.
- Rising labour costs and weak business sentiment have seen a weaker labour market, and are expected to ease pay pressures, while unemployment may rise only marginally.
- The Chancellor faces a significant challenge to adhere to her fiscal rules while pursuing a growth agenda. The fiscal headroom remains tight with the risk of downgrade to the forecast high.
In our UK Economic Outlook – April 2025, we look at the potential impact of increasing global trade frictions and the implications for UK fiscal and monetary policy.
Download the report for our full analysis. Or read on for a summary.
UK Economic Outlook - April 2025
In our latest UK Economic Outlook we look at the prospects for the UK economy for 2025 and 2026, including our analysis of growth prospects, consumer spending, trade, inflation, interest rates, the labour market and public sector finances.
Summary of KPMG’s latest forecasts for the UK
| 2024 | 2025 | |
Real GDP | 1.1 | 0.8 | 0.8 |
Consumer spending | 0.6 | 1.3 | 1.1 |
Investment | 1.5 | 1.5 | 1.2 |
Unemployment rate | 4.3 | 4.5 | 4.7 |
Inflation | 2.5 | 3.2 | 2.3 |
Base interest rate | 4.75 | 3.75 | 3.25 |
Source: ONS, KPMG forecasts. Note: Average % change on previous calendar year except for unemployment rate, which is average annual rate. Inflation measure used is the CPI and the unemployment measure is LFS.
Higher tariffs to undermine growth
The announced US tariffs on UK exports could see GDP growth fall to 0.8% in 2025 and 2026. A more severe scenario, if trade frictions continue to escalate, would worsen the outlook. Despite the relatively low rate of tariffs imposed on UK exports to the US compared to many other trading partners, the UK is expected to see a material hit to its economic growth over the medium term. Higher tariffs on specific categories such as cars and aluminium and steel will more than offset the exemption on pharmaceutical exports, leaving the effective tariffs imposed on UK exports to the US around 12%.
Public finances likely to be under further pressure
The underlying UK economic picture in the first half of 2025 is weak, with both hard economic data and soft survey evidence pointing to thin growth prospects across a range of economic sectors this year. Global uncertainty and declining business sentiment have caused a weaker labour market and a slowdown of business investment growth, despite the gradual cuts to the Bank of England base rate.
UK public finances remain fragile after the Spring Statement which saw a modest downgrade in the outlook for public finances due to a worsening economic outlook. The UK fiscal framework and limited levels of headroom mean that the anticipated deterioration in the economic outlook would put further pressure on public finances. With downgrades to the OBR forecasts at the time of the Autumn Budget likely, the Government may need to respond with further spending cuts or tax increases.
Monetary Policy: more easing of rates to come
Global central banks remain in the midst of a loosening cycle however heightened domestic and global uncertainty could make the Bank of England’s Monetary Policy Committee (MPC) more cautious about further rate cuts.
The pace of cuts over the coming MPC meetings will be determined by the extent to which the domestic shocks households and businesses are facing affect underlying inflationary pressures.
Inflation is expected to rise over the coming months, peaking at around 3.6% by the autumn, and remain slightly above target until mid 2026. Upward pressure to inflation will come from several sources, with households facing another steep rise in utility bills, while businesses look to pass on increases in labour costs.
The Bank is expected to lower interest rates in May, August and then in the autumn, taking base rates down to 3.75% by the end of 2025. Next year we expect the Bank of England to cut interest rates twice more, with rates expected to settle at 3.25% over the coming years.
