Economic Growth Projections Amid Potential Tariffs and Budget Plans
The National Institute of Economic and Social Research forecasts a 1.5% growth for the UK economy in 2025, amidst rising concerns over inflation and proposed tariffs from the US.
The National Institute of Economic and Social Research (NIESR) released its quarterly economic outlook on January 24, projecting that the UK economy will grow by 1.5% in 2025. This upward revision from its previous forecast of 1.2% is attributed primarily to the substantial spending plans laid out in the Government’s October Budget, which include an increase of approximately £70 billion annually, supported by increased borrowing and elevated business taxes.
Chancellor of the Exchequer Rachel Reeves introduced these spending plans in the October Budget, aiming to stimulate economic activity.
However, NIESR cautioned that the predicted growth may only represent a temporary boost.
The think tank emphasized that firms might reduce investments and hiring due to impending tax increases, including heightened national insurance contributions and wage adjustments set to take effect in April 2024.
Further complicating the economic landscape are the potential tariff measures proposed by former US President Donald Trump, which NIESR estimates could lower the UK's GDP growth by 0.2 percentage points in the initial year if confirmed.
The UK government is also on track to adhere to its newly established fiscal rules, though high borrowing costs could constrain its budgetary flexibility.
NIESR's report revealed that consumer and business confidence saw a decline during the latter part of the previous year, contributing to stagnation in GDP growth.
In contrast, the think tank anticipates a robust recovery in 2025 as government spending initiatives take effect.
Nevertheless, it highlighted that the bottom 40% of British households are not expected to regain their living standards to pre-2022 levels until beyond 2027.
Additionally, the report projected inflation to have risen to 3.2% in January as a result of increased energy prices, forecasting an average inflation rate of 2.4% for the year.
In response to inflationary pressures, the Bank of England recently reduced interest rates to 4.5%, the lowest since June 2023, suggesting that only one further rate cut may occur throughout this year.
NIESR interim director Stephen Millard stated that while a temporary growth surge is anticipated due to increased government spending, long-term economic advancement will rely heavily on escalated private and public investment and the facilitated planning reforms necessary for such investments.
Deputy director Adrian Pabst pointed out that despite signs of growth and rising real wages, the recovery for many households remains slow, particularly emphasizing the need for additional measures to support the lowest-income households, such as adjustments to personal income tax thresholds in line with inflation, slated for April 2028.
Chancellor of the Exchequer Rachel Reeves introduced these spending plans in the October Budget, aiming to stimulate economic activity.
However, NIESR cautioned that the predicted growth may only represent a temporary boost.
The think tank emphasized that firms might reduce investments and hiring due to impending tax increases, including heightened national insurance contributions and wage adjustments set to take effect in April 2024.
Further complicating the economic landscape are the potential tariff measures proposed by former US President Donald Trump, which NIESR estimates could lower the UK's GDP growth by 0.2 percentage points in the initial year if confirmed.
The UK government is also on track to adhere to its newly established fiscal rules, though high borrowing costs could constrain its budgetary flexibility.
NIESR's report revealed that consumer and business confidence saw a decline during the latter part of the previous year, contributing to stagnation in GDP growth.
In contrast, the think tank anticipates a robust recovery in 2025 as government spending initiatives take effect.
Nevertheless, it highlighted that the bottom 40% of British households are not expected to regain their living standards to pre-2022 levels until beyond 2027.
Additionally, the report projected inflation to have risen to 3.2% in January as a result of increased energy prices, forecasting an average inflation rate of 2.4% for the year.
In response to inflationary pressures, the Bank of England recently reduced interest rates to 4.5%, the lowest since June 2023, suggesting that only one further rate cut may occur throughout this year.
NIESR interim director Stephen Millard stated that while a temporary growth surge is anticipated due to increased government spending, long-term economic advancement will rely heavily on escalated private and public investment and the facilitated planning reforms necessary for such investments.
Deputy director Adrian Pabst pointed out that despite signs of growth and rising real wages, the recovery for many households remains slow, particularly emphasizing the need for additional measures to support the lowest-income households, such as adjustments to personal income tax thresholds in line with inflation, slated for April 2028.
