The UK economy received an unexpected lift in early 2025 due to a rush in business activity triggered by President Trump’s sweeping tariffs on global trade. However, forecasters warn that the long-term impact of the U.S.-led trade war will likely hinder economic momentum in the years ahead.
According to the latest report by the EY Item Club, Britain’s GDP is now projected to grow by 1% this year—up from its earlier forecast of 0.8%. The upgrade was attributed to a surge in corporate spending and exports in the first quarter, as businesses rushed to place orders and ship goods ahead of the U.S. tariffs that took effect in April.
“There was some activity and some additional exports brought forward and that lifted [the economy] in the first quarter,” said Matt Swannell, chief economic adviser to the EY Item Club. “But you can see from the size of the upgrade that the outperformance wasn’t massive.”
Despite the early uptick, Swannell warned of “relatively meagre momentum” for the remainder of 2025 and into 2026. A combination of ongoing global tensions, potential tax increases, and lingering effects of past interest rate hikes are expected to keep the economy sluggish.
The forecaster predicts UK GDP will grow by just 0.9% in 2026 before reaching what Swannell calls the country’s “cruising speed” of 1.5% in 2027.
The subdued economic outlook is mirrored in the job market. The unemployment rate is expected to rise to 5% by year-end, up from 4.7%. “We’re seeing that firms are slowing hiring but they’re not going through large-scale layoffs,” Swannell said, describing the labour market loosening as “orderly.”
Yet, recent figures from job search site Adzuna show some signs of resilience, with UK job vacancies reaching 875,546 — a 2.7% increase year-on-year and the strongest growth since July 2022. Andrew Hunter, co-founder of Adzuna, called it a “potential turning point” but noted that hiring remains uneven and still below pre-pandemic levels.
Caution among employers has been partly driven by rising labour costs, including the increase in the national minimum wage and employers’ national insurance contributions. These, combined with higher household energy bills, are expected to push inflation to 3.4% in 2025 — above the 3% forecast made in the spring.
Persistent inflation pressures are likely to prompt the Bank of England to begin trimming interest rates later this year, with cuts expected in August, November, and February, ultimately lowering the bank rate to 3.5%.
“While the MPC appears more concerned about cutting interest rates too quickly rather than too slowly, a softening job market and cooling pay growth should provide reassurance that domestic inflationary pressures are set to fade, albeit gradually,” Swannell added.
Though the economy has dodged a rougher start to the year, economists say geopolitical uncertainty and trade tensions will continue to cast a shadow over the UK’s recovery.
