The Macroeconomic Outlook for the United Kingdom

Since the October 2024 Budget, the UK economy has faced significant headwinds. Low consumer and business confidence, coupled with global uncertainty and rising trade tensions, have all weighed down on economic activity. While global factors such as tariffs and geopolitical risks have tended to dominate headlines, it is domestic factors that primarily underpin the fragile outlook for the UK economy in 2025. Businesses face significant cost pressures as the increases in the National Minimum Wage (NMW), the National Living Wage (NLW) and employers' National Insurance Contributions (NICs) announced in the autumn have now come into effect. In addition, wage growth remains elevated above 5 per cent, meaning that labour costs remain high. With margins already squeezed, businesses are expected to respond by delaying investment and scaling back hiring activities this year. The UK fiscal outlook also remains fragile, which has further dampened sentiments. In the Spring Statement, the Chancellor restored the £9.9 billion fiscal headroom that the OBR estimated was left after the Budget through a combination of reductions in current expenditure and the growthenhancing effects of planning reform. However, this small buffer has prompted concerns among businesses that tax rises may be on the cards in the next Autumn Budget as the Chancellor is now unlikely to be on track to meet her fiscal rules at that point. In contrast, the additional government spending measures announced last year are now taking effect and are likely to support economic activity in 2025. However, the extent to which these measures prove to be growth-enhancing will depend on the degree of slack in the UK economy. We have incorporated tariffs into our forecast for this UK Economic Outlook. We remain cautious about whether the newly announced tariffs will be sustained, rolled back, or escalated further in response to potential retaliation from other countries. With this caveat in mind, we have incorporated the tariff rates that were in place on 9 April into our forecast by assuming that there will be a 10 per cent universal tariff, a 54 per cent tariff on Chinese goods (with a 34 per cent retaliatory tariff on Chinese imports of US goods) and separate 25 per cent tariffs on steel and aluminium. To summarise, while tariffs and global trade uncertainty have undoubtedly dampened sentiments, they are unlikely to be the primary drivers of lacklustre UK economic performance this year. Instead, underlying cost pressures and subdued confidence, shaped by domestic policy and an uncertain fiscal outlook, are playing a more dominant role.