In our UK Economic Outlook – September 2025, we look at the potential impact of increasing global trade frictions, potential tax rises, inflation and interest rates and the implications for UK fiscal and monetary policy.
Download the report for our full analysis. Or read on for a summary.
The prospect of tax rises in the Autumn Budget dampens sentiment for both businesses and households.
While rising inflation coupled with slowing wage growth could see household incomes squeezed, raising the likelihood of muted consumer spending over the coming quarters. while inflation remains elevated.
A mixed short-term outlook for GDP growth
After an unexpectedly strong start to the year, we expect a more muted pace of growth in the second half of 2025 which will persist into the early part of 2026. The overall GDP growth rate will be 1.2% in 2025 and 1.1% in 2026. Internal and external headwinds continue to dominate the outlook, with modest tailwinds arising from lower interest rates and increased public spending in the UK and Europe on defence and infrastructure.
Elevated levels of global uncertainty, together with the impact of tax rises both in the 2024 Autumn Budget and those expected in the 2025 Autumn Budget, could result in relatively modest increases in business investment despite falling interest rates. Investment could see a growth of 1.9% for the whole of this year.
Bank of England to ease interest rate cuts in 2026
More hawkish Monetary Policy Committee (MPC) members have cautioned against moving too quickly with interest rate cuts, however there is scope for one more interest rate cut by the Bank this year. We see interest rates falling to 3.75% by the end of 2025 but next year is likely to see fewer rate cuts as the Bank moves closer to the neutral rate. Expect two further cuts in 2026, leaving rates at 3.25% in the medium term.
Exports feel the force of US Tariffs
Headwinds generated by the new US tariffs announcements are expected to lead to a slowdown in UK-US trade, with exports remaining subdued for the remainder of the year as well as into 2026. Any strong exports performance in the early part of 2025 is likely to represent frontloading efforts, which may lead to even weaker activity for the remaining of the year. UK goods exports to the US were 23% higher in March of this year compared to the average monthly values in 2024. However, they have since fallen to a level 21% below the 2024 average level by June.
Inflation to peak at 4% this year
Inflation is expected to rise over the coming months and remain above target until the latter part of 2026. The recent rise in inflation has largely been driven by domestic factors, with increases in National Insurance Contributions (NICs) and uncertainty surrounding the Autumn Budget taking headline inflation to peak at 4% in the autumn and remain around that level for the rest of 2025. Inflation could then gradually fall from early 2026, returning to the Bank of England’s 2% target only later next year.
