The UK economy grew by just 0.1% in the final quarter of 2025, according to the Office for National Statistics (ONS), far from the springboard Chancellor Rachel Reeves had hoped for as Labour aims to deliver on its economic promises in 2026. Despite six interest rate cuts from the Bank of England since mid-2024, consumers and businesses remain cautious.
The services sector was flat over the quarter, while construction declined by 2.1%, hitting Labour's housebuilding targets. Over the whole of 2025, GDP expanded by 1.3%, a modest improvement on 1.1% in 2024. GDP per head rose by 1%, after flatlining the previous year, but this still falls short of Labour's pre-election pledge to secure the highest sustained growth in the G7.
Economists point to external factors such as Donald Trump's tariff policies and internal factors including Reeves's £25bn employer national insurance rise in April 2025 and the chaotic run-up to her second tax-raising budget in November. However, there are reasons for optimism in 2026. The Bank of England has signalled a seventh rate cut, possibly as soon as next month, and Reeves's budget included price-cutting measures like reduced energy bills to help inflation return to target.
Business investment rose by 3.5% in 2025, though it fell in the fourth quarter. Forward-looking surveys suggest an upturn, though anxiety about job cuts persists. Reeves aims to make the spring forecast from the Office for Budget Responsibility a non-event, avoiding last year's turmoil. Economists expect growth to pick up unless a leadership contest destabilises the government.
