UK Economy Limps Along with 0.1% Growth in Final Quarter of 2025
The UK economy expanded by a mere 0.1% in the final quarter of last year, according to the latest data from the Office for National Statistics. This sluggish performance falls far short of the springboard Chancellor Rachel Reeves had hoped for as Labour aims to deliver on its economic promises by 2026.
Consumers and Businesses Remain Cautious Despite Rate Cuts
Despite six interest rate cuts from the Bank of England since mid-2024, both consumers and businesses have yet to respond with increased confidence. Output from the key services sector remained flat over the quarter, while construction—a critical component of Labour's ambitious housebuilding targets—declined by 2.1%.
Over the entire year, GDP grew by 1.3%, a modest improvement from the 1.1% recorded in 2024. GDP per head, a more accurate measure of living standards, increased by 1% after stagnating the previous year. However, this growth rate is not aligned with Labour's pre-election pledge to achieve the highest sustained growth in the G7.
External and Domestic Factors Weigh on Growth
The Treasury has pointed to external challenges, including instability from Donald Trump's fluctuating tariff policies, which disrupted financial markets and forced US-facing businesses to reassess their supply chains. Domestically, economists highlight the impact of Reeves's £25 billion employer national insurance increase in April and the chaotic lead-up to her second tax-raising budget in November.
Comparatively, Canada under Prime Minister Mark Carney saw faster growth of 1.6% in 2025, and while fourth-quarter data for the US is pending, it is expected to have outperformed the UK.
Reasons for Optimism in 2026
Looking ahead, there are signs of potential improvement for 2026. Policymakers at the Bank of England's recent rate-setting meeting indicated a seventh interest rate cut could occur as soon as next month, despite leaving rates unchanged at 3.75%. This optimism stems partly from Reeves's budget, which included price-cutting measures such as reduced energy bills, aimed at helping inflation return to target levels.
The Treasury hopes that another rate cut, combined with these anti-inflation efforts, will boost wary consumers and reassure businesses. Forward-looking surveys have recently pointed to an upturn, though concerns about job cuts persist.
Encouraging Signs and Future Risks
Reeves may find encouragement in the 3.5% rise in business investment for 2025, a key factor in improving the UK's lagging productivity, despite a decline in the fourth quarter. She also plans to avoid the turmoil of last year's budget by making next month's spring forecast from the Office for Budget Responsibility a low-key event.
Economists now anticipate growth to accelerate in the coming months, barring any disruptive political events. As Thomas Pugh of consultancy RSM noted, the primary risk is a protracted leadership contest that could reintroduce tax increases and uncertainty, potentially derailing economic progress.
