The UK economy is bracing for a challenging 2025, with fears of stagflation—a toxic mix of stagnant growth and high inflation—looming large. Recent polling data reveals that over half of Britons share a pessimistic outlook, with 57% expecting the economy to decline in the coming year. Only 53% of respondents believe inflation will fall below the Bank of England’s target rate of 2%, reflecting widespread uncertainty about the country’s economic trajectory.
The latest GDP figures paint a concerning picture, showing the economy contracted in both September and October 2024. Economists are now closely monitoring December’s performance, as a lack of improvement could push the UK into a technical recession by early 2025, marked by two consecutive quarters of negative growth. Adding to the concerns, the pound has dropped to its lowest value against the dollar in seven months, further eroding confidence in the economic outlook.
While the first quarter of 2024 saw a robust rebound with 0.7% growth, the economy has since stagnated. Zero growth in the third quarter and the Bank of England’s projection of no expansion in the final quarter signal a stark reversal of fortunes. This stagnation has led analysts to speculate that the Government may need to introduce an emergency budget in spring 2025, potentially raising taxes to address the fiscal challenges.
Government policies aimed at driving growth now face significant hurdles. Labour’s budget from October 30 has sparked concerns, particularly with plans to increase employer National Insurance contributions and raise the minimum wage in 2025. Many businesses have warned that these measures will force them to raise prices, potentially pushing inflation above 3% by spring 2025. The higher costs may also lead companies to scale back hiring, further straining the economy.
Chris Williamson of S&P Market Intelligence criticized the proposed policies, stating that businesses are signaling strong disapproval, especially of the National Insurance hikes. Similarly, Laith Khalaf, head of investment analysis at AJ Bell, highlighted the risk of stagflation, noting that “the green shoots of an inflation revival seem to be pushing up the turf.” He added that the Bank of England is unlikely to cut interest rates aggressively given the persistent inflationary pressures.
Although the OECD predicts the UK economy will grow by 1.7% in 2025, this optimism contrasts sharply with the current mood among economists and businesses. The combination of stagnating growth, rising inflation, and policy challenges has cast a shadow over the UK’s economic prospects, making 2025 a critical year for navigating these headwinds.
