UK's Economic Outlook Dimmed Amidst Tax Hikes and Trade War Concerns

The United Kingdom's economic outlook has been revised downward for 2025 as the country grapples with a combination of tax increases, rising borrowing costs, and declining business confidence.

Sluggish Growth Forecast

The EY Item Club projects UK's GDP will expand by a mere 1% this year, below previous estimates of 1.5%. The slowdown is attributed to a sluggish winter economy. The Chancellor's October Budget, which raised National Insurance contributions and the minimum wage, is seen as a major contributor to the economic stagnation.

Unemployment and Investment Impact

The EY Item Club anticipates unemployment to climb to 4.6% as businesses reduce spending due to the increased costs. Declining interest rates and increased household spending are expected to provide some relief, but Chief Economic Advisor Matt Swannell emphasizes the need for sustained growth beyond 1% in 2025.

Trade War Risks

The UK faces the potential fallout from a global trade war as the Trump administration imposes tariffs on various countries. While UK's exposure is relatively limited compared to the EU, the impact of tariffs on specific sectors remains uncertain. Swannell cautions that the full extent of the tariff schedule and its economic consequences are yet to be determined.

Fiscal Constraints

The Office for Budget Responsibility may require the Chancellor to cut spending or increase taxes if borrowing costs continue to rise, posing a challenge to her fiscal rules. Slowing growth could also affect tax revenues, further complicating the borrowing targets.

Business Confidence and Investment

Business confidence has plummeted since the October Budget, leading to a projected investment growth of only 2% this year. The analysts attribute this to financial tightening, higher labor costs, and corporate uncertainty. The slowdown in investment is expected to continue through 2026.

Chancellor's Plans Hampered

Recent plans by the Chancellor to boost investment and economic growth have been met with setbacks. Pharmaceutical giant AstraZeneca's cancellation of a £450m vaccine factory two days after its announcement highlights the challenges facing investment in the UK.