From recession to rate cuts: my six economic predictions for 2025

I usually feel queasy when writing predictions for the year ahead. After all, the internet is forever and if you get it wrong there’s always someone to post a link on social media in a year’s time with the aggressive, but unoriginal, line: “This you?”

But if economic forecasters, with their supercomputers, spreadsheets and master degrees from fancy institutions, can end up looking daft, how bad could it really get for me?

So let’s dive in at the (very) deep end with my predictions for UK plc in 2025.

I expect the Office for National Statistics will this year confirm that Britain has experienced a recession. That means two consecutive three-month quarters of negative economic growth; 2024 Q3 (July- September) is already sitting at a big fat zero – so one more downward revision to that figure and we’re halfway there. With no one expecting much from 2024 Q4 (October-December) – the Bank of England has another zero pencilled in – we might already be there.

A poor start to 2025 – and the forward-looking data I’ve seen doesn’t look great – gives another chance for this prediction to prove correct. The latest survey from the British Chambers of Commerce shows its members’ confidence has dropped to the lowest level since the first (and last) Budget of Liz Truss. Consumer confidence is mired in negative territory.

A consolation I can offer is that the recession will be short... although I’d also put my house on the OECD revising down its prediction of 1.75 per cent growth for the UK in 2025.

The Bank of England will cut interest rates. But only twice. Here’s some new year cheer: the first cut will come in February and will be hailed by every small business owner and mortgage holder. The Bank is clearly worried about the economy (see prediction one), which explains the split 6-3 vote to keep rates on hold in December by the Monetary Policy Committee (MPC). A weak economy will move the dial next time. However, remember, the 2 per cent inflation target is king. So the MPC will only cut rates one more time because...

Inflation will peak at over 3 per cent. This is higher than most commentators are predicting, but I fear they’re missing the impact of Rachel Reeves’s Budget. The BCC report said that more than half of Britain’s companies (55 per cent) plan to hike prices over just the next three months. Businesses are facing a double whammy from her decision to increase employer national insurance contributions (NICs) coupled with high wage settlements. Service price inflation has been running hot and the price of goods is, I think, set to head up. Energy prices are a consistent bugbear.

Reeves is going to have to borrow – and borrow big. The chancellor has already altered the government’s fiscal framework – no surprise there given there have been nine such changes in 16 years. She still wants borrowing to fall as a proportion of GDP by the end of the parliament. But even after her tax rises, public finances are in a mess. Before long, there will be talk of her self-imposed rules being broken. (However, I would agree with borrowing to invest; one reason we are in such a mess is under-investment in UK plc.)

A more positive prediction: Donald Trump will back away from his universal tariffs on imports into the US. America’s president-elect has trumpeted his intentions to impose universal tariffs of up to 20 per cent on imports, but reports are already emerging that he is rethinking his approach. He won the election in no small part because of persistent inflation under Joe Biden and the impact it ordinary Americans who, rightly or wrongly, feel the economy was better under Trump’s last turn in the Oval Office.

Universal tariffs that punish other countries sound good to a would-be strongman, but they’ll also hit the US economy and, crucially, fuel inflation. It is for this reason that we’re now seeing reports that the tariffs will be “targeted” at specific sectors. And there may be deals to be done too. Expect a tough line on China, in particular. But not the bombshell that was feared.

It will get better in the second half of the year. I hope. Yes, we’re going to feel pain early on as firms get hit by Reeves’s tax rises in April. But that investment spending will deliver an economic sugar rush that should get things moving again. It will not be a fun year, but the second half will look cheerier than the first; I promise.