Increased government spending is likely to boost GDP, however business investment and trade are likely to suffer in 2025 – through the impact of the national insurance rise and major global uncertainties.
The QEF, winner of the 2024 FocusEconomics award for best GDP forecast, expects the UK economy to grow by 0.8% in 2024, a downgrade from the previous forecast (1.1%). Growth has been revised upwards for the next two years – with 1.3% expected in 2025 and 1.5% in 2026, higher than previous forecast (1.0% and 1.1%). Upgrades to 2025 and 2026 are driven by increased levels of government spending, but the overall growth landscape remains relatively weak.
The rise in employer national insurance contributions, announced at the Budget, has had a small impact on the forecast – including average earnings and unemployment.
Inflation is now expected to remain above the Bank of England’s target until the end of 2026, due to increased business costs and global trade uncertainties. CPI is forecast to be 2.2% in Q4 2025, unchanged from the previous forecast, and 2% in Q4 2026, slightly higher than the last forecast.
As businesses face tough decisions on costs, unemployment has been revised upwards to be 4.5% by the end of 2025 before falling to 4.2% in 2026 (previously 4.4% in 2025 and 4.1% in 2026).
Business investment will continue to struggle throughout the forecast period, exacerbated by the upcoming rise in employer national insurance contributions. It is expected to increase by 1.5% in 2024, but then grow only 0.9% in 2025, recovering to 2.1% by the end of 2026. That’s a revision down for 2025 compared with the previous forecast of 1.4%, as firms will face a number of increasing costs next year.
The forecast picture on growth varies significantly across different sectors. Manufacturing production is expected to grow by 0.6% in 2025 and 1.2% in 2026. In comparison the construction industry will grow by 1.4% in 2025 and 1.5% in 2026.
Business investment will continue to struggle throughout the forecast period, exacerbated by the upcoming rise in employer national insurance contributions. It is expected to increase by 1.5% in 2024, but then grow only 0.9% in 2025, recovering to 2.1% by the end of 2026. That’s a revision down for 2025 compared with the previous forecast of 1.4%, as firms will face a number of increasing costs next year.
The forecast picture on growth varies significantly across different sectors. Manufacturing production is expected to grow by 0.6% in 2025 and 1.2% in 2026. In comparison the construction industry will grow by 1.4% in 2025 and 1.5% in 2026.
The outlook for trade is expected to remain challenging due to trade barriers with the EU, global conflicts and the threat of tariffs. Imports are expected to contract by 0.2% in 2025 and grow by just 0.9% in 2026. Exports are forecast to grow by 0.2% in 2025 rising to 1.1% by the end of 2026.
But net trade continues to contract with figures of -1.5% in 2024, -1.4% in 2025 and -1.5% in 2026. This a downward revision across the period on our last forecast.
Average earnings are expected to grow more slowly next year as businesses deal with increased employment costs, including national insurance and the national living wage. Annual wage growth is expected to be 3.5% in Q4 2024, rising to 3.8% in 2025 and 4.0% in 2026. That compares to our previous forecast of 4.0% in 2024 and 2025 and 3.5% in 2026.
The average unemployment rate is expected to be 4.5% by the end of 2025, falling to 4.2% in 2026. That is a slight increase from last quarter’s forecast as businesses are likely to face difficult decisions on recruitment going forward due to increased employment costs.
Youth unemployment will remain stubbornly high, with the percentage out of work forecast to be 14.9% in 2025 before falling to 14.6% in 2026.
The BCC is forecasting the Bank of England will continue with a cautionary approach to further interest rate cuts, as some inflationary pressures persist. The forecast expects the base rate to be 4% by the end of 2025 falling to 3.50% by the end of 2026.
“Our forecast expects the national insurance hike, alongside other growing cost pressures on business, to impact on several economic indicators over the coming months.
“GDP is expected to pick up slightly next year, but that’s likely to be down to more government spending. Our research continues to show that most SMEs are not increasing investment, amidst an array of rising costs and admin burdens.
“The knock-on effect of rising business costs are likely to restrict wage growth in the short term and employment, as firms struggle to pass on costs and boost recruitment. With fears of a tariff war and continued trade barriers with the EU, international trade will be challenging for many firms.
“Our surveys already showed a fall in business confidence before October’s Budget. While the full impact of the Chancellor’s statement is yet to be seen, businesses face tough decisions as bills rise. It’s vital that business rate reform is accelerated and much anticipated strategies on industry, infrastructure and trade deliver at pace in the months to come.”
“While government spending will underpin economic growth next year, businesses will be left licking their wounds as the fallout from the tough autumn Budget continues.
“The BCC forecast shows the likely impact of rising costs, from changes such as national insurance. This means business investment and jobs will be hit.
“As they face a difficult 2025, firms need reassurance the Government can very quickly outline a clearer framework to boost growth and business investment.”
You can find more data on the Quarterly Economic Forecast here.
Read more latest news from the BCC here.
