UK Economy Stagnates with 0.1% Growth in Late 2025, Eyes Turn to 2026 for Recovery
The UK economy barely expanded in the final quarter of 2025, recording a meager 0.1% growth, according to the latest data from the Office for National Statistics. This sluggish performance falls far short of the springboard Chancellor Rachel Reeves had hoped for as Labour aims to deliver on its economic pledges, with Reeves suggesting 2026 could be the year for tangible progress.
Weak Consumer and Business Response Despite Rate Cuts
Despite six interest rate cuts by the Bank of England since mid-2024, consumers and businesses have remained cautious, failing to spur significant economic activity. Output from the crucial services sector was flat over the quarter, while construction—vital for Labour's ambitious housebuilding targets—declined by 2.1%. Over the full year, GDP expanded by 1.3%, a slight improvement from 1.1% in 2024, but still not aligning with Labour's pre-election promise to achieve the highest sustained growth in the G7.
GDP per head, a key measure for living standards, increased by 1% in 2025 after stagnating the previous year. However, this growth pales in comparison to other nations; for instance, Canada saw faster growth of 1.6% in 2025, and the US is expected to have outpaced the UK once fourth-quarter data is published.
External and Domestic Challenges Weigh on Growth
The Treasury has pointed to external factors, such as instability from Donald Trump's fluctuating tariff policies, which disrupted financial markets and forced businesses to reassess supply chains. Domestically, economists highlight the impact of Reeves's £25 billion employer national insurance increase in April 2025 and the chaotic lead-up to her second tax-raising budget in November, which may have dampened economic momentum.
Reasons for Optimism in 2026
Looking ahead, there are glimmers of hope for 2026. Policymakers at the Bank of England's recent rate-setting meeting indicated a potential seventh interest rate cut, possibly as early as next month, despite holding rates steady at 3.75%. This optimism stems in part from anti-inflation measures in Reeves's budget, including reductions in energy bills, which are expected to help inflation return to target levels.
The Treasury hopes that another rate cut, combined with these measures, will boost wary consumers and reassure businesses. Forward-looking surveys have shown signs of an upturn, though concerns about job cuts persist. Encouragingly, business investment—seen as critical for improving the UK's lagging productivity—rose by 3.5% in 2025, despite a drop in the fourth quarter.
Avoiding Past Turmoil and Future Risks
Reeves aims to make the upcoming spring forecast from the Office for Budget Responsibility a low-key event, avoiding the turmoil of last year's botched statement, which included welfare cuts that were later reversed. Economists now anticipate growth to pick up in the coming months, barring potential political instability. As Thomas Pugh of consultancy RSM noted, the biggest risk is a protracted leadership contest that could reintroduce tax increases and uncertainty, potentially derailing recovery efforts.
In summary, while the UK economy limped through late 2025 with minimal growth, targeted policies and cautious optimism set the stage for a potential turnaround in 2026, provided political and economic challenges are managed effectively.
