UK ECONOMIC SNAPSHOT MAY 2025
The UK economy is showing tentative signs of recovery, but underlying challenges continue to weigh heavily. GDP grew by 0.6% in the three months to February 2025, a modest improvement driven largely by the service sector. Manufacturing bounced back in February with a 2.2% uptick, but output remains below last year’s levels. Construction also nudged upward by 0.4%. Productivity, although rising slightly quarter-on-quarter, is still down 0.8% from a year ago — a persistent drag on long-term economic resilience.
Globally, conditions are softening. The IMF recently downgraded the UK’s 2025 growth forecast to 1.1%, in line with the Office for Budget Responsibility’s 1.0% projection. Global GDP expectations have also been trimmed to 2.2%, reflecting broad-based slowdown risks, especially in major trading partners.
Inflation has continued its downward trajectory, falling to 2.6% in March from 2.8% in February. Core services inflation now stands at 4.7%, and the trend suggests that the Bank of England’s 2% target is within sight. Real wages are rising again — average weekly earnings excluding bonuses rose 5.9% year-on-year, translating into a real terms increase of around 3%. This has provided some relief for households, even as consumer confidence remains fragile.
The labour market is showing signs of cooling. Employment remains high at 34 million, but unemployment has ticked up to 4.4%, with youth unemployment notably higher at 14.6%. While wage growth remains strong, employers appear increasingly hesitant about long-term hiring. Permanent job placements have fallen for 13 consecutive months.
On the fiscal front, borrowing for the 2024–25 fiscal year came in at £152 billion — £15 billion higher than forecast. Public sector net debt now stands at 95.8% of GDP. With debt servicing costs on the rise, fiscal headroom is narrowing. Interest rates remain at 4.5%, with the Bank of England maintaining a cautious stance until inflation is fully under control.
External trade remains a weak point. The UK registered a trade deficit of £4.8 billion for the three months to February. Exports rose 4.6% but were outpaced by a 2.6% rise in imports. The current account deficit widened again in Q4 2024 to £21 billion, a sign that the UK remains reliant on foreign capital inflows. The pound has strengthened to $1.29 against the US dollar but weakened slightly to €1.19 against the euro. On a trade-weighted basis, sterling is down 2.2% year-on-year.
Consumer activity remains mixed. Retail sales volumes increased 1.6% in March, driven by strong non-food spending, but food sales continued to decline. The GfK consumer confidence index dropped to -23 in April, its lowest level since late 2022. Business sentiment also weakened, especially in manufacturing and services, with PMIs falling and investment plans increasingly cautious.
Household debt has dropped to 118.1% of disposable income — its lowest level since 2007 — as consumers continue to deleverage. The housing market, however, has defied broader economic softness. Prices rose 5.4% year-on-year to February, buoyed by gains in the North of England. Mortgage approvals are up 8% annually, though momentum is slowing. The average two-year fixed mortgage rate now sits at 4.70%, slightly down from earlier highs but still elevated by historical standards.
Industrial momentum remains weak. April’s manufacturing PMI dropped sharply to 44.0 — the lowest in 18 months — reflecting falling output, new orders, and worsening export demand. Input cost pressures have eased, but weak global demand and post-Brexit frictions continue to hamper the sector.
In short, the UK economy is treading water — not sinking, but far from sailing smoothly. Stabilisation in inflation and wage growth offers some optimism, but weak investment, stagnant productivity, and fragile confidence are keeping recovery shallow. Policymakers and businesses alike face a delicate balancing act through the rest of 2025.
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