Growth downgraded as firms battle rising costs

Business investment and exports are likely to suffer this year because of the impact of the National Insurance rise and global uncertainties. Inflation and interest rates are also expected to stay higher for longer.

The QEF, winner of the 2024 FocusEconomics award for best GDP forecast, expects the UK economy to grow by 0.9 per cent in 2025, revised down from the previous forecast (1.3 per cent). 

This year’s limited growth will be driven largely by increased day-to-day government spending. GDP is expected to rise in 2026 to 1.4 per cent but that is also slightly down from the last forecast (1.5 per cent). 

With businesses facing increased cost pressures following last Autumn’s Budget, inflation is now expected to remain above the Bank of England’s target until the last quarter of 2027.

CPI is forecast to be 2.8 per cent in Q4 2025 (up from 2.2 per cent in the last forecast), before falling to 2.1 per cent by the end of 2026 and 2 per cent in Q4 2027.

Unemployment is expected to rise to 4.6 per cent by the end of 2025 (compared to 4.5 per cent in the previous forecast). The rate is then predicted to remain at that level for the rest of the forecast period, as labour costs reduce business appetite for hiring.

The forecast picture on growth varies significantly across sectors. 

Manufacturing production is expected to contract -0.2 per cent (down from 0.6 per cent in the last forecast) rising to 0.8 per cent in 2026 and 1.1 per cent in 2027. In comparison, the construction industry will grow by 1.3 per cent this year and reach 1.5 per cent in 2026. The services sector is forecast to increase at 1.1 per cent in 2025 and 1.5 per cent in 2026.  

Trade continues to be challenging 

With continuing difficulties trading with the EU and wider global uncertainties, exports are forecast to contract by 0.5 per cent in 2025 (compared with a rise of 0.2 per cent in the previous forecast.) Exports are predicted to recover slightly in 2026, growing by 1 per cent, rising by 2.1 per cent in 2027.

Imports are expected to be flat (0.0 per cent) this year before reaching 0.8 per cent in 2026. Net trade continues to contract, with figures of -1.2 per cent in 2025 and 2026, falling to -1.4 per cent in 2027.

David Bharier, Head of Research at the British Chambers of Commerce, said: “Our downgrade to the economic outlook is reflective of the severe pressures piling up on businesses right now.

“UK firms are facing a double whammy of rising domestic taxation and a potential global trade war. Businesses are telling us that the rise in National Insurance and the minimum wage will increase costs, stall investment, and cause them to rethink their workforce plans.

“The specific impacts are yet to be fully seen. By April, when the changes come in, we may see more concrete action from firms. If they do start making redundancies, this could potentially reduce tax take. Rising tariffs and energy costs are also feeding into fears.

“In this environment, it is difficult to see where high levels of economic growth will come from. UK firms will need to see a reduction in both input costs and the barriers to global trade. The AI boom could also stimulate growth, but smaller businesses will need support in adoption.”