United Kingdom – 2025-2026 Scenario: tariffs and uncertainty darken the outlook

We expect GDP growth of 0.3% quarter-on-quarter in the first quarter of 2025 after +0.1% in the fourth quarter of 2024. But the recently released monthly GDP data for February suggest upside risks to our forecast. Growth in the first quarter could be close to 0.6% in quarterly variation.

Activity is expected to slow down in the second quarter. We expect growth of around 0.2% quarter-on-quarter due to increased global uncertainty, tighter financial market conditions following the imposition of tariffs by the White House, but also the rise in employer National Insurance contributions (NICs) by the UK government and in regulated energy prices in April.

Annual GDP growth is revised downwards to 0.9% in 2025 and 1.4% in 2026 (compared to 1.1% and 1.6% expected respectively three months ago), forecasts surrounded by a high degree of uncertainty due to the uncertain impact of tariffs. We have revised upwards our unemployment rate forecast to 4.7% in the second half of 2025 and in 2026, from 4.4% in the fourth quarter of 2024.

US tariffs on goods imported from the UK could subtract from 0.1% to 0.6% of UK real GDP, or even more in the event of retaliation or announcements of additional tariffs (notably those expected on pharmaceutical products); in the worst-case scenario imagined by the OBR, tariffs can subtract up to 1% of UK GDP in 2026-27. Such an impact is not factored into our forecasts. On the labour market, employment expectations were already deteriorating due to the rise in labour costs in April (employers NICs and the national living wage) and several tens of thousands of jobs could be lost as a result of the tariffs. 

With the government having almost no room for manoeuvre, any support for the economy will have to be provided by a more aggressive easing of monetary policy. We expect the BoE to cut rates by 25 basis points per quarter this year (in May, August and November 2025) in our central scenario, which would bring the Bank rate to 3.75% at the end of the year (from 4.5% today). However, the BoE could accelerate its pace of rate cuts.