The UK could be the third fastest growing economy in the G7 this year, with GDP projected to increase by 1.5% in 2025, according to the latest quarterly UK Economic Outlook by the National Institute of Economic and Social Research (NIESR).
According to the outlook, this growth will be driven mainly by the fiscal expansion announced in the October Budget, which is set to start having a tangible effect during the course of 2025.
The predicted increase in GDP, though, will not translate immediately into higher living standards for every household, the NIESR warned.
NIESR projections implied that the living standards of the bottom 40% of households will not return to pre-2022 levels before the end of 2027.
Whilst real personal disposable income was projected to grow by 1.9% in 2025 and 1% in 2026, the trade body has said this will not compensate for the fall in living standards that happened between 2022 and 2024.
In addition, the research revealed that the Budget will have some positive effect on lower income households: those in the second-income decile will be better off by about £2,400 in 2025-26 thanks to the substantial increases in the National Minimum Wage (NMW) and the National Living Wage (NLW).
For households earning between approximately £16,000 and £24,000, living standards will be about 12.5% higher relative to the “no uplift” counterfactual.
For those households, the rise in NMW and NLW will also translate into higher labour market participation and lower unemployment rates: projected inactivity is lower by about 3% and projected unemployment rates are lower by about 1.5% than would have been the case without higher NNW/NLW rates.
As for inflation, the NIESR forecasted a rise to 3.2% in January (due to base effects), before falling slowly back to target, and to average 2.4% in 2025.
It also predicted one more rate cut in 2025, in line with persistent wage growth this year, together with an expansionary fiscal policy and exchange rate depreciation.
Professor Stephen Millard, NIESR interim director, said: “Although consumer and business confidence fell at the back end of last year leading to a flattening of GDP, we expect 2025 to be better as the large increase in government spending announced in the October budget kicks in.
“However, this will only be a temporary boost. Much more important for long-run growth will be increased private and public investment and the planning reform needed to enable this to happen.”
Professor Adrian Pabst, deputy director for public policy, said: “Higher economic growth and continued real wage growth will provide a welcome relief for millions of households who have seen their living standards decline in recent years.
“But the recovery is slow, and more should be done to help the poorest 20% of households, for example by bringing forward the uprating of personal income tax thresholds in line with inflation scheduled for April 2028.
“‘Left behind’ regions of the country that are held back by deep gaps in housing and transport connectivity need more public and private investment to catch up, otherwise regional inequalities will become even more entrenched.”
