The UK looks set for another year of weak growth in 2025. The big real income gains are in the rear-view mirror, fiscal policy is set to tighten, and the lagged effects of past interest rate rises are still being felt. Latterly, those domestic headwinds have been supplemented by the impact of global trade market uncertainty.
This is the view of Matt Swannell (Chief Economic Advisor at EY), who notes that the early signs are that the UK looks set for much softer growth in the second quarter of 2025, with output already having fallen in April.
“A feature of the last year was that households preferred to save rather than spend a lot of their real income gains. A saving ratio of 10.9% in Q1 was far higher than usual, although it was a fall of 1.1 percentage points from Q4. With earnings growth slowing and inflation set to rise, growth in real income looks set to slow across the rest of this year, but with scope for households to save a little less, there is space for consumption to be cushioned from this slowdown.
“After the strong start to 2025, the UK looks set for another year of weak growth, with headwinds continuing to intensify. On top of weakening real income growth, fiscal policy has been tightened, while some households will still feel the lagged effects of past interest rate rises. Global trade market volatility and the accompanying elevated levels of uncertainty have added to the headwinds.”
The UK’s gross domestic product (GDP) is estimated to have grown by 0.7% in Q1 2025, data published by the Office for National Statistics on Monday (30 June) shows.
This marks the biggest quarter of growth since 2014. In output terms, growth during the quarter was driven by an increase of 0.7% in the services sector, production also grew by 1.3%, and the construction sector grew by 0.3%.
In expenditure terms, growth in the latest quarter was driven by increases in gross fixed capital formation, net trade and household consumption. Nominal GDP is estimated to have increased by 1.5%, mainly driven by an increase in compensation of employees.
Real household disposable income (RHDI) per head is estimated to have decreased in the latest quarter by 1% from a revised 1.8% increase in the previous quarter. The household saving ratio is estimated to have decreased by 1.1 percentage points to 10.9% this quarter, driven by a fall in the non-pension savings contributions.
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