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Projections regarding the evolution of the British economy in 2025 have been fairly optimistic so far. The Bank of England forecasts 1.5% GDP growth, and Bloomberg economists agree on a 1.3% increase.
However, new estimates from Goldman Sachs (NYSE:GS) Research paint a slightly different picture, putting the figure a bit lower, at 1.2%, which indicates that the UK’s economy might not see the expected surge.
The quarterly breakdown in the report titled UK Outlook 2025: A Gradual Pace, but More Cuts Than Priced shows a more pronounced growth of 0.4% during the first three months of 2025 compared to the final months of 2024, followed by a decline to 0.25-0.30% from one quarter to the next for the rest of the year.
Numerous factors come into play when assessing a country’s economic outlook, which can suffer modifications over time, making accurate forecasting a rather challenging endeavour. According to Goldman Sachs economists, several significant variables are expected to have a notable impact on the UK’s economic development over the next year, namely trade relations with the United States, whose economy is poised to soar ahead and influence growth in the euro area and beyond, further rate cuts from the Bank of England and the proposed reform of the planning system which is set to introduce new housebuilding targets for councils.
Monetary policies under President Trump
The US and the UK have a strong economic partnership. The US is the largest market for UK exports of goods and services, accounting for 22% of the UK’s total exports in 2024. The US is also the largest import market, accounting for 13.2% of the UK's total imports in the same year.
Given the bilateral trade relationship between the US and the UK, any changes in the US monetary policy are bound to significantly impact the UK’s financial sector. With the new president-elect, Donald Trump, ready to take office on January 20th, all eyes are now on his plans for the US economy and the policy changes he will develop, particularly regarding the trading agreements with the UK in 2025.
Although most analysts agree that the new administration’s measures will not significantly divert the economy or current fiscal arrangements, the uncertainty looming at the moment is enough to create tensions and dampen growth in the eurozone.
The effects also trickle down to the UK, where we can expect the evolution of financial markets and overall trading activity to reflect this ambiguity.
Patience is key for investors right now, even as the stock market remains strong and the growing number of UK trading platforms facilitates access to a broader range of products and services.
If the US decides to increase trade tariffs on imported goods, as President Trump promised, UK exports might also suffer. However, the rate hike is expected to affect Chinese, Mexican, and Canadian imports, so the UK’s situation remains unclear for now.
Moreover, according to specific reports, the US might be planning to draw up a special free-trade agreement with the UK, provided US healthcare companies are granted more extensive access to the UK market.
At the same time, the UK might be looking to strengthen ties with the European Union in the near future, a direction change that is underlined by a potential UK-EU veterinary agreement which is expected to increase UK agri-food exports to the EU by 22.5% and boost imports by 5.6%. UK Chancellor of the Exchequer Rachel Reeves has also expressed the intention of improving trade relations with the EU, as highlighted by her recent visit to Brussels.
According to Reeves, easing access to markets will bolster the economy by breaking barriers to trade and building closer economic ties between the UK and EU. However, experts warn that these measures might not be enough to cover the cost of Brexit and could also affect relations with the US.
A bold autumn budget setting great expectations
UK’s autumn budget was characterised by an upsurge in capital spending, with a special focus on tax increases, infrastructure investment, significant health and education funding, and green technologies.
These changes were designed to boost output, hinting at rising demand in the short term. However, later budget updates seem to indicate that the economy is still in a consolidation phase, and GDP growth will likely wane towards the end of the year. Reviewed estimates from the Office for Budget Responsibility (OBR) will clarify whether initial projections were overly optimistic.
The current budget leaves very little headroom against fiscal targets, which is basically eliminated if we consider the changes the OBR foresees in its macroeconomic outlook.
If economic growth is slower than anticipated, as Goldman Sachs economists believe, the OBR will likely go over their projections and revise them accordingly.
GDP growth driven by planning reform The government's announcement earlier this year of overhauling the planning system is another key element in the UK’s economic outlook.
The reform aims to streamline the planning process, which currently needs to be more convenient and leads to chronic delays. This would establish new targets aligning with the growing housing demand and accelerate home-building.
Given the lack of information on these policies, it’s difficult to determine their impact on the economy. However, if these plans are implemented, they might increase residential investment. It’s also worth noting that the reform’s impact will largely depend on how much it increases labour productivity.
Inflationary pressures and the BoE’s decision to cut interest rates are also expected to affect the development of the local economy.
An original version of this article can be viewed at Pound Sterling Live