Rachel Reeves’ budget ‘will boost UK economic growth in 2025’

Posted by author February 12, 2025 Bussiness

The UK economy will grow by 1.5% in 2025, according to a thinktank forecast, which said this would be fuelled by measures announced in the autumn budget.

The National Institute of Economic and Social Research (NIESR) said in its latest quarterly outlook, released on Wednesday, that the UK could be the third-fastest growing economy in the G7 this year.

NIESR said that this growth will be “driven mainly by the fiscal expansion announced in the October budget, which will start having a tangible effect during the course of 2025, coupled with continued growth in business investment.”

This could offer some relief for chancellor Rachel Reeves, as a number of UK businesses have warned of higher costs following increases in employer national insurance contributions and the national minimum wage, which were announced in the autumn budget.

This latest projection was up from the 1.2% growth NIESR forecast in its previous quarterly economic outlook in November.

However, the thinktank warned that this wouldn’t immediately translate into higher living standards for every UK household. NIESR’s projections suggested that living standards for the bottom 40% of households would not return to pre-2022 levels before the end of 2027.

Benjamin Caswell, senior economist at NIESR, said in a press conference ahead of the release of the outlook that the thinktank also projected that the UK’s gross domestic product (GDP) would grow by 1.5% in 2026.

He said the forecasts for 2025 and 2026 are “driven primarily by an increase in government expenditure, but it’s also supported by an improvement in net exports. Net exports are improving because the UK pound is depreciating so UK exports become more attractive internationally.”

“Beyond 2027, the impact of the stimulus fades and the pressures of crowding out subside and then business investment recovers and this drives growth in the end-of-forecast period,” Caswell added.

That said, Caswell flagged that there were “significant upside risks and downside risks” for this forecast. On the upside, he said that if the impact of stimulus materialises, this could restore confidence, which may boost investment and growth in the UK.

“However, on the downside there’s still a lot of trade uncertainty and as the UK is a small open economy, its particularly exposed to the effects of tariffs,” he said.

Trade tensions have been escalating, as US president Donald Trump has started to follow through on tariff plans. Trump had initially announced plans to impose 25% tariffs on imports from Canada and Mexico but decided to delay imposing the duties shortly before they were due to come into effect.

However, the president has imposed a 10% tariff on China, as well as 25% duties on all steel and aluminium imports.

Under the NIESR’s scenario analysis, Caswell said trade tariffs could reduce annual GDP growth this year anywhere between 0.05% and 0.25%.

“Therefore, under a high tariff scenario the UK would grow at 1.25% this year,” he said.

As for inflation, NIESR forecast that price growth would peak at around 3.2% in January this year before gradually reverting back towards the Bank of England’s (BoE) 2% target and would average out at around 2.4% in 2025.

Caswell said there were some risks to NIESR’s inflation forecasts.

“Domestically there’s upside risk, which is stemming from persistent wage inflation and also coming from the increase in employers’ national insurance contributions,” he said. “For example, survey data suggests that firms are likely to pass a significant portion of the increase in national insurance contributions on to consumers in the form of higher prices.”

On the international side, Caswell highlighted tariffs as another risk, with the thinktank’s scenario analysis implying that this could contribute anywhere between 0.2% and 0.4% to headline inflation.

“So if you take the higher number there, instead of having 2.4% for the year, you’d have 2.8% for the year,” he said.

As for its outlook on interest rates, NIESR forecast the BoE would announce one more cut this year.

NIESR said in its outlook report that the “effects of continued real wage growth, fiscal expansion and exchange rate depreciation limit the scope for monetary loosening.”

“While the government is likely to meet its new fiscal rules, there will be no space for extra expenditure in response to a shock or the need for higher public investment to get growth going for as long as the self-imposed constraints on tax remain in place.”

The BoE announced a 0.25% rate cut in its first meeting of the year last week, lowering the base rate to 4.5%. In a forecast released alongside its latest decision, the central bank warned that the UK economy will expand by just 0.75% this year, a significant cut from the 1.5% growth it predicted just three months ago.

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