UK economy could rebound by 1.7% in 2025 but geopolitical issues loom large

As the UK looks ahead to more growth in 2025, the year could bring renewed challenges from a higher pace of inflation, increased trade frictions, and a heightened state of economic uncertainty.

The ultimate impact will depend on policy responses and the interplay of these trends on a global scale according to the latest KPMG Economic Outlook.

Table 1: Summary of KPMG’s latest forecasts for the UK economy

Buoyed by a looser monetary and fiscal policy stance, growth in the UK economy may stage a welcome recovery after a lacklustre performance in the second half of 2024. GDP growth could more than double from 0.8% in 2024 to reach 1.7% this year.

Meanwhile, UK consumers could ramp up the pace of spending after a cautious recovery last year which saw many continuing to prioritise savings. As household incomes continue to be boosted by robust pay growth and lower interest rates provide less incentives for saving, increases in disposable incomes could translate into a 1.8% increase in consumer spending this year.

However, stronger growth could come at a cost of higher and more persistent inflation, as businesses pass on the cost of tax rises as they enjoy a temporary glut of demand. Inflation is now projected to remain above the Bank of England’s 2% target until 2027.

This short term pick-up in growth is unlikely to be sustained as the economy continues to be constrained by a weak pace of productivity growth and shortfalls in labour force participation. There is now a clear role for policy in addressing the historically weak pace of productivity and economic growth. The recently announced Modern Industrial Strategy, with detailed plans expected in 2025, aims to target growth. Central to this strategy is the National Wealth Fund (NWF), which will build on the UK Infrastructure Bank’s initiatives to invest in projects aligned with the government's growth and industrial strategy objectives.

Yael Selfin, Chief Economist at KPMG UK, said:

"Long-term UK economic growth will depend on the effective implementation of the Modern Industrial Strategy and the ability of the National Wealth Fund to identify and invest in high-impact projects. The success of these initiatives will be critical in determining whether public investment can translate into sustained economic growth."

Global central banks remain in the midst of a loosening cycle; however inflation is still a challenge for some and going forward rate cuts may become less frequent, less predictable and more data dependent. With growth in the Eurozone continuing to disappoint, the ECB may break away from this pattern, opting to cut rates faster and deeper than its peers.

So far, the Bank of England has maintained a cautious stance, with only two rate cuts in 2024 amid concerns about persistent domestic inflation. We forecast three additional rate cuts in 2025, ending the year with a rate of 4%.

Yael said: "As global economic conditions begin to diverge after the end of the global inflationary shock, central banks must navigate a more uncertain and volatile economic environment. The risk of policy error remains high, which could prompt a slower and more deliberate approach from policymakers."

The incoming US administration's willingness to use tariffs to achieve policy goals could escalate trade frictions, influencing the global economic outlook for 2025 and 2026.

A flare-up in trade frictions which sees tit-for-tat tariffs imposed around the world could lower UK GDP by 0.4%, with an even larger hit to more export-oriented economies in Europe.

Yael added: "Trade tensions and uncertainties about the scale and timing of tariff measures add another layer of uncertainty to the global economic outlook. While we expect some form of tariff barriers to be in place by the end of 2026, a slow ramping-up could help limit its impact on growth in the main forecast."

-ENDS-

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Notes to Editors:

About KPMG UK

KPMG LLP, a UK limited liability partnership, operates from 20 offices across the UK with approximately 18,000 partners and staff. The UK firm recorded a revenue of £2.96 billion in the year ended 30 September 2023. 

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