The UK economic outlook: Subdued demand today, steadier growth ahead

At the BHTA 2025 Joint Section Meeting, Glynn Jones from the Bank of England presented ‘The economic outlook for the UK’.

A slow‑moving recovery after the pandemic

Glynn noted that once the Bank changes the bank rate, it can take around 18‑24 months before it has an impact on consumers and businesses, so the economy is still absorbing the impact of earlier rate increases.

The UK economy has struggled to grow post-covid. It has seen near‑stagnation since mid‑2024 due to domestic and international uncertainties that have affected consumers and businesses. The Bank’s central forecast foresees a gradual upturn, with annual GDP growth rising to roughly 1.75 percent by the end of the three‑year horizon, still below the pre‑financial‑crisis trend of more than two percent.

Household spending is held back by uncertainty: the saving ratio has climbed to 11 percent despite real income gains from cooling inflation and still‑firm wage settlements.

On the corporate side, investment intentions remain positive but subdued, reflecting persistent domestic and global uncertainties since the 2016 referendum.

Temporary rise in inflation, but disinflationary forces build

Headline CPI has nudged above three percent, largely because of one‑off increases in regulated utility tariffs and energy bills. The Monetary Policy Committee is “looking through” this move; futures curves point to lower energy costs than in 2022, and domestic demand is not running hot.

More persistent gauges of price pressure are easing: services inflation and wage growth, which peaked close to eight percent, have slowed as vacancies fall and labour‑market slack emerges. On current projections, CPI returns to the two percent target during 2026 so long as inflation expectations remain anchored.

External headwinds weigh on trade and sentiment

Globally, growth has slowed to about half its pre‑pandemic pace amid heightened tariff uncertainty and the re‑routing of supply chains. UK net trade is therefore expected to exert a modest drag on output throughout the forecast. Tariff‑related disinflation should dampen import prices in the near term, while the longer‑term effects on competitiveness remain uncertain. Energy markets, though still volatile, are not assumed to repeat the 2022 price shock in the Bank’s baseline.

Labour‑market adjustment under way

Vacancies have fallen sharply from their 2022 peak, and evidence points to a pause in hiring as firms rebuild balance sheets and respond to higher borrowing costs. Wage settlements are moderating in line with this softer demand for labour.

Structural issues, including elevated inactivity linked to ill‑health and recent shocks such as Brexit, the pandemic, and the energy crisis, may be weighing on potential supply, raising questions about the economy’s speed limit; however, reliable data on these shifts will take time to emerge.