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Everything you need to know about how the UK economy might fare in 2025
11.02.20252024 may be firmly in the rear-view mirror but the impact of certain events from last year will continue to be felt well into 2025.
Major elections across the world brought new leaders, most noticeably in the UK and the US, and the Autumn Budget introduced financial legislation that might require you to revisit your plans.
With some market uncertainty lingering, you might wonder how the UK economy will fare in 2025.
Keep reading to find out.
Inflation and interest rates could continue to cool this year
Inflation has been a key concern since the lifting of coronavirus restrictions heralded the start of the cost of living crisis. Since its 11.1% peak in October 2022, inflation has been falling and it continued to cool in 2024.
Indeed, the Office for National Statistics reveals that the Consumer Prices Index (CPI) fell from 4% in the 12 months to January to 2.6% by November.
There are several reasons to remain optimistic about inflation. The British Chambers of Commerce predicts that inflation will continue to ease, potentially reaching as low as 2.2% by the final quarter of 2025, only slightly higher than the Bank of England’s (BoE) 2% target.
This suggests increased stability for the economy, with the caveat that significant global events could cause further uncertainty.
The BoE base rate, which has a role in managing inflation, also fell from 5.25% in January to 4.75% in November.
As of 7 January 2024, the base rate remains at 4.75%, and while predictions vary, most experts expect further reductions in 2025. According to Morningstar:
- Morgan Stanley predicts five cuts throughout 2025
- Goldman Sachs, Allspring, and AXA expect quarterly cuts
- Morningstar anticipates three to four cuts.
Lower interest rates are good news for borrowers and indicative of stabilising inflation.
GDP growth stagnated in the second half of 2024 but could rise in 2025
Gross domestic product (GDP) is a key metric for tracking economic activity within a country, as it includes the production of goods and services by businesses, the government, and people.
The BBC reports that while the UK did experience a brief period of recession at the end of 2023 – marked by GDP shrinking for two consecutive quarters – it rebounded in the first half of 2024, rising by:
- 7% between January and March
- 5% between April and June.
Growth then stalled between July and September, with no change in GDP.
Despite this slowing of growth in the second half of 2024, experts are still pragmatic about 2025. In fact, S&P Global now forecasts that the UK’s GDP could grow by 1.5% this year, a slight upgrade from its previous projection of 1.2%. Meanwhile, KPMG offers a more optimistic look, predicting a 1.7% growth in real GDP for 2025.
2024 was marked by periods of volatility but markets could climb this year
As we have already seen, several events in 2024 resulted in notable market turbulence. The so-called “August sell-off” saw significant declines in major indices across the world, including:
- The Nikkei 225 in Japan, which the Associated Press reveals recorded its largest single-day drop in 37 years
- The S&P 500, which the Guardian states suffered its worst day in nearly two years.
Election results also played a role in some market movements. Following Donald Trump’s victory, for instance, the S&P 500 saw its best week in almost a year, rising nearly 5% over five days (according to Fidelity).
At home, Labour’s election victory and the implementation of their Budget announcements might also be reflected in markets in 2025.
According to interactive investor, a high dividend yield in the UK could lead to share price appreciation this year, making the market more attractive. While in the US, BlackRock expects US companies to increasingly benefit from the growth of AI, which could fuel earnings and boost stock market performance.
Ultimately, the Motley Fool estimates that the S&P 500 could rise to 6,500 by the end of 2025, a potential gain of around 9%, while the FTSE 100 could climb by 21%, potentially reaching 9,900 points by December 2025.
Trust in your financial plan
Rolling news and worrying headlines can make it tempting to act impulsively but, whatever 2025 brings for the UK economy, you must trust your financial plan and stay the course. Remaining calm is always key, so stay focused on your long-term goals.
If you have any questions or concerns please reach out to a Foster Denovo adviser by emailing advise-me@fosterdonovo.com or calling 0330 332 7866 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Foster Denovo Private Wealth is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority.
Sources: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23
https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
https://www.bbc.co.uk/news/business-13200758
https://kpmg.com/uk/en/home/media/press-releases/2025/01/uk-economy-in-2025.html
https://apnews.com/article/stocks-markets-nikkei-japan-yen-e814f5ec794426e07ad74e1be2cb72ce
https://www.theguardian.com/business/article/2024/aug/08/wall-street-stock-market-crash
