Investing.com – The UK economy is tipped to grow by 1.5% in 2025, up from 0.9% last year, according to estimates from analysts at UBS.
In a note to clients, the analysts suggested that “less contractionary fiscal policy” could provide the British economy with a “decent amount of momentum” this year.
However, the country’s private sector may struggle under the weight of elevated taxes, borrowing costs and wage expenses, the analysts flagged.
In December, official figures showed that the UK economy failed to grow in the July-to-September period, marking a tepid beginning to the government of Prime Minister Keir Starmer. The Office for National Statistics said it now expects gross domestic product output during the three months of 0.0%, down from its prior estimate of 0.1% expansion.
Starmer’s government, which came into power in July, has unveiled fresh tax bumps for companies, fueling concerns among many businesses. The negative sentiment was particularly noticeable in the UK’s manufacturing sector, the UBS analysts noted, adding that this “has continued to deteriorate as firms plan for the prospect of a steep increase in taxes.”
Meanwhile, the Bank of England has predicted that UK economy will not grow in the final quarter of 2024, although policymakers chose to leave rates unchanged at their latest meeting due to concerns over lingering inflationary pressures.
However, the UBS analysts said they believe the “recent slump” in the British economy is “unlikely to persist,” citing the impact of public spending plans announced in the latest UK budget put forward by Starmer and his finance minister Rachel Reeves in late October. The proposal is “likely to result in a fiscal stimulus” that could add an estimated 0.5% to GDP in the coming year, the UBS analysts said, citing forecasts from the Office for Budget Responsibility.
Still, the first budget from Starmer and his in-power Labour party has “laid bare the precarious state of the UK’s public purse,” the analysts warned. The decision to press ahead with increased spending — and only offset it partially with higher taxes — “has […] heightened these concerns,” they added.
“So, despite large tax increases last year, the outlook for public finances remains challenging,” the analysts said. “How the government will deal with this is yet unclear, but few of the options available are appealing.”
