Lacklustre end to 2025 for UK growth

The UK economy grew by just 0.1% in the final quarter of 2025 and 1.3% for the year as a whole. We expect 2026 to grow a little more slowly than that, on account of little-to-no disposable income growth, weak business confidence and tighter government policy.

UK GDP grew just 0.1% in the fourth quarter

Britain’s economy ended 2025 on a lacklustre note, not that it was a huge surprise. The economy grew by 0.1% in the final quarter and 1.3% overall last year.

What’s particularly eye-catching from the release is just how weak business investment (-2.7%) and construction (-2.1%) came in during the final few months of the year. The former will have been heavily influenced by volatile car production, linked to a major cyberattack at the tail-end of the third quarter, even if it’s tempting to blame it on the wider uncertainty in the run-up to the Budget and the weakness in business confidence.

The weakness in construction is a reminder that past Bank of England rate hikes are still biting. The average interest rate on outstanding mortgage debt is still rising, not least given the jump in mortgage refinancing expected over the next few months.

That being said, we have to take the latest GDP figures with at least a pinch of salt. Growth has become suspiciously seasonal. The first half of the year has looked much stronger than the second every year since 2022. Though hard to pin down, we suspect it’s partly down to higher inflation, the prevalence of price hikes early on in the year, which are not being fully adjusted for in the deflator/seasonal adjustment process somewhere along the line. There’s no reason to think this trend will stop in 2026, and if for no other reason, we suspect we’ll get a bit of a bounce back in Q1 GDP.

UK GDP growth has become suspiciously seasonal

Source: Macrobond, ING

2026 is likely to be weaker than 2025

However, we think 2026 will be weaker than 2025 – though not dramatically so. Real disposable income growth is likely to be virtually flat. Inflation is set to fall dramatically – from 3.4% in December to 1.8% in April, where it will more-or-less stay for the rest of the year. But wage growth is falling rapidly too. For there to be meaningful consumption growth this year, we’re going to need to see further downward progress in the savings ratio. And we’re sceptical that it will happen at scale.

The weakness in business confidence will likely be a further drag on investment too, though the pick-up in lending growth hints that this weakness needn’t last much beyond the first or second quarter. And finally, the government is likely to be more of a drag this year. Departmental spending is growing much less rapidly, while the one percentage-point projected fall in the deficit, driven heavily by the freeze in tax brackets, is a drag. The jobs market remains fragile too, judging by surveys. We’re forecasting 1% growth this year.

Nothing in the latest GDP data is of huge consequence for the Bank of England. It had already acknowledged that the fourth quarter looked weak. If the recent weakness in hiring/unemployment, coupled with rapid falls in wage growth, persists over the next couple of readings, then we think a March rate cut is highly likely. We expect another cut in June.

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