The UK economy is expected to grow by 1.5% in both 2025 and 2026, according to a recent forecast by the National Institute of Economic and Social Research (NIESR). This projection suggests the UK could be one of the fastest-growing economies within the G7 this year, primarily driven by the fiscal expansion announced in the October budget.
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Fiscal Expansion and Business Investment Drive Growth
NIESR attributes the projected growth to the government’s fiscal measures and continued growth in business investment. The October budget’s impact is anticipated to become more apparent throughout 2025. However, this positive outlook is tempered by concerns from UK businesses regarding increased costs due to rises in employer national insurance contributions and the national minimum wage, also introduced in the autumn budget. This 1.5% growth forecast marks an upward revision from NIESR’s previous projection of 1.2% in November.
Uneven Distribution of Economic Gains and Long-Term Outlook
Despite the overall positive growth projection, NIESR cautions that this economic expansion may not translate into immediate improvements in living standards for all households. Their analysis suggests that the bottom 40% of households might not see their living standards return to pre-2022 levels until after 2027. Looking beyond 2027, NIESR anticipates that the initial stimulus will fade, and business investment will recover, ultimately driving growth in the longer term.
External Factors and Potential Risks to Growth
While the fiscal stimulus and business investment are expected to be the primary drivers of growth, NIESR acknowledges the influence of external factors. A depreciating pound is expected to boost UK exports, further contributing to economic expansion. However, significant risks remain, including ongoing trade uncertainties and the potential impact of tariffs, particularly given the UK’s vulnerability as a small, open economy. Escalating trade tensions and the implementation of tariffs by the US on various imports pose a downside risk to the UK’s economic outlook.
Inflation Forecast and Monetary Policy Response
NIESR projects that inflation will peak at approximately 3.2% in January before gradually returning to the Bank of England’s (BoE) 2% target, averaging around 2.4% in 2025. Potential risks to this inflation forecast include persistent wage inflation, increased employer national insurance contributions, and the impact of international tariffs. The think tank anticipates one more interest rate cut by the BoE this year, but acknowledges that factors such as real wage growth, fiscal expansion, and exchange rate depreciation limit the scope for significant monetary loosening. This contrasts with the BoE’s recent rate cut and its more cautious growth forecast of 0.75% for the year.
Conclusion: Growth Amidst Uncertainty
The UK economy is poised for growth in the coming years, driven by government spending and business investment. However, challenges remain, including ensuring equitable distribution of economic gains and navigating global trade uncertainties. The interplay between fiscal policy, monetary policy, and external factors will ultimately determine the UK’s economic trajectory.
