Will we see stronger economic forecasts for growth in the UK in 2025?

I recently had the pleasure of sitting down with David Smith , Economics Editor of The Sunday Times, to discuss the key economic developments of 2024, and the UK’s economic and political outlook for 2025.

Politics, what it means for the UK What does the political shift mean for the UK?

?The UK appointed its first Labour government in 14 years, which was regarded as a positive move for the UK, providing stability after a turbulent period of time. However, not long after Kier Starmer started occupying Number 10, Labour produced a budget that proved vastly unpopular to many.

David went on to explain that although the implications of inheritance tax on pension pots and farms drew public attention, the main impact lies in the rise of National Insurance costs to employers, and the national minimum wage increases. These changes will have an impact on all businesses, but will hit the retail, consumer and hospitality sectors where low-cost labour is most utilised.

David commented: “National insurance and minimum wage increases will force closures and consolidations within consumer markets. However, this may present a natural shift required in these markets where perhaps some of the creative destruction we failed to see in the previous recessions will now force such weaker businesses to close.

The so called “shock treatment” that the Labour government has put into force may increase the UK’s need to increase stronger productivity growth. Requiring businesses to provide clearer, more detailed and efficient strategies to navigate turbulent waters and come out of these challenging times better off. Hiring will become about making clear and strategic decisions on who to hire, for what role and for how long.”

In the US, President Trump’s election stirred global opinions, but fundamentally, has improved the US economy. Although dividing political opinion on an international scale, the US economy has reacted calmly to the re-election, perhaps signifying the saying “better the devil you know”.

David commented; “Having Trump back in power signifies risks associated to threats that he has made in relation to introducing tariffs on trade with the UK, something he previously did with China when last in power. Tariffs on the UK would be impactful and unwelcome given the US is the UK’s second biggest trading partner (after the EU). Some comfort however lies in the appointment of Scott Bessent as Economic Advisor to President Trump, who will look to soften any sort of tariff agenda the president-elect might look to impose.

Inflation and interest rates

One thing that was clear in our discussion was that although inflation, fell below 2% in the UK in September 2024, it is unlikely to drive interest rates back to near-zero as we experienced pre-pandemic. However, David was confident in his predictions of inflation hovering around the 2% mark into 2025, which could lead to further interest rate cuts from the Bank of England.

“An inflation rate hovering around the 2% mark through 2025 will enable the Bank of England to cut interest rates further. Perhaps not as dramatically as we experienced in the pre-pandemic period, but we are likely to see 3-4 more interest rate cuts in 2025 taking us down to levels between the 3% and 4%.

This in turn, will drive consumer spending. Those businesses suffering from the Labour budget national insurance and minimum wage hikes could benefit from real income growth, and consumer spending looks to rise with lower interest rates and greater consumer wealth off the back of it. So, although more costs for businesses are on the horizon, we should see more consumer demand coming through in 2025 to help balance the increase in business costs.”.

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Private equity and public markets

In an article I shared earlier this year; ‘Is the IPO outlook for UK PLCs improving amid regulatory reforms? - Eton Bridge Partners’, I talked a lot about the positive outlook of the London Stock exchange for years to come, however given Rachel Reeves’s budget changes around capital gains tax on carried interest rising from 28% to 32%, I was keen to quiz David around these two significant financial markets and how he feels they might react over the next 12 months.

David commented: “The private equity market knew something was coming, unlike a lot of other things, the different treatment of carried interest was in the Labour manifesto. I think the PE markets are ok with this actually; most people in PE before the budget will continue with it with a little sigh of relief that it could have been worse. My predictions are that the PE market will remain active in the UK.

Things like consolidation of local authority pensions, the move to get more pension fund investment into UK entities, will be seen as quite positive in terms of listings and stemming the loss of floats to the US, and increasing the capital base of the UK.”

A fascinating insight from David, and something that was interesting to reflect on after quite the turbulent year with the UK and global economy.

In summary, there has been obvious uncertainty geopolitically, with knee jerk reactions from elections in both the UK and US which have made themselves clearly known. However, with interest rates projected to be cut over the next 12-months, growth in consumer confidence is picking up and so there is a slight element of responsibilities of consumers and businesses to invest in the UK economy. It might not be all gloomy dark clouds over the UK for 2025, but rather a time of potential and renewal for the UK.