The latest economic report from CNBC’s UK Exchange newsletter highlights the complex landscape that has emerged in the U.K. economy as 2025 draws to a close. Despite widespread expectations at the beginning of the year for significant interest rate cuts from the Bank of England, these anticipated reductions have largely failed to materialize. Inflation rates, too, have not declined as forecasted, presenting challenges for both consumers and businesses alike.
Analysts initially projected a growth rate between 1.3% to 1.5% for the U.K., a figure that the economy has managed to hover around despite a backdrop of negative sentiment. GDP saw a growth of 0.7% in the first quarter, setting the tone as the best performance among G7 nations. However, this growth was primarily buoyed by exporters ramping up inventories in anticipation of new tariffs from the U.S., leading to a sharp decline in growth rates in subsequent quarters. By mid-year, growth had stagnated at 0.3% in the second quarter and faltered to a scant 0.1% in the third, ultimately resulting in a contraction in September and October.
The nation’s labor market has also shown signs of strain. The unemployment rate has ticked up to 5.1%, a level not seen since early 2021. A recent survey by the Recruitment and Employment Confederation (REC) reported a 14.4% decrease in new job postings between October and November, a concerning trend as retailers typically increase hiring during the holiday season. This decline points to the lingering impact of heightened National Insurance Contributions introduced last year, which are now influencing employment opportunities.
Inflation has emerged as another unexpected twist in the year’s economic narrative. Originally anticipated to rise to around 2.75% by mid-2025, consumer price inflation has surpassed this expectation, reaching 3.8% in July, before slightly subsiding to 3.6% in October. Government policies have been significant contributors to this inflationary pressure, with increases in administered prices and labor costs cited as major factors. Additionally, adjustments in the living wage and expansions to the sugar tax are forecasted to add further upward pressure on prices as we move into 2026.
Despite these economic headwinds, the stock market has demonstrated resilience. The FTSE 100 has surged by more than 18% this year, potentially outperforming the S&P 500 for the first time since 2022. However, the more domestically focused FTSE 250, typically more reflective of UK corporate health, has only risen by about 7%. This disparity highlights the struggles faced by UK-centric businesses, many of which have seen significant drops in their stock values. Notably, WH Smith experienced a 44% decline attributed to accounting issues, and major brands like Greggs and Domino’s Pizza have also seen significant drops due to subdued consumer spending.
In a broader context, Vicky Pryce from the British Chambers of Commerce emphasized the lack of sufficient investment in the UK, stating that fixed investment as a percentage of GDP remains significantly lower compared to other G7 nations—a factor contributing to stagnating productivity levels.
Recent weeks have also seen volatility in the markets with the FTSE 100 experiencing fluctuations; a rise in unemployment and mixed economic data did not deter the index from maintaining gains. As the year winds down, the pound has gained ground against the dollar, and government bond yields have seen slight climbs, indicating cautious optimism among investors.
Looking ahead, upcoming economic indicators will be crucial, including the November inflation rate and the Bank of England’s interest rate decision, as businesses and consumers brace for the potential implications of fiscal policies and market conditions in the new year.
