The British Economy Faces a Critical Moment: Sustaining Growth in 2025
For over a decade, the British economy has struggled to find its footing. Economic growth has been tepid, and a series of crises have exacerbated its challenges. The political chaos following the Brexit referendum in 2016 undermined stability, while the COVID-19 pandemic and subsequent lockdowns choked economic activity. Later, the surge in energy prices triggered by Russia’s invasion of Ukraine in 2022, combined with inflation-induced interest rate hikes, further compounded the difficulties. However, as these tumultuous events fade into the background, the economy faces a pivotal moment.
Inflation has largely retreated, nearing the Bank of England’s 2% target, signaling a return to economic normalcy. In 2024, the British economy showed signs of recovery, with growth picking up and forecasts becoming progressively optimistic. As we enter 2025, the key question is whether this growth momentum can be sustained. Several factors indicate a favorable environment for continued expansion. Interest rates are declining, reducing borrowing costs for businesses and consumers. Domestically, political stability has improved under the new Labour government. While not without flaws, many of its policies—especially those focusing on infrastructure investment and housebuilding—offer a promising foundation for future growth.
Opportunities and Threats
Despite this optimistic backdrop, significant risks remain. Labour’s occasional advocacy for soak-the-rich tax policies could deter investment, undermining the government’s efforts to attract foreign and domestic capital. A global economic slowdown would pose another challenge, particularly for Britain’s medium-sized, open economy that relies heavily on international trade. The prospect of heightened trade tensions following Donald Trump’s inauguration as U.S. president in 2025 adds to the uncertainty, although Britain’s focus on service exports might mitigate the impact of tariffs on goods.
However, the gravest concern lies in the possibility that even under stable global conditions and sound domestic policies, economic growth might remain lackluster. Such an outcome would point to a more entrenched structural issue. Historical data offers little comfort. Productivity growth was weak even during the relatively calm years between the global financial crisis of 2007-09 and the Brexit referendum in 2016. While overall GDP growth during that period appeared more robust, it was largely driven by demographic shifts, including increased workforce participation by women and immigrants. If Britain fails to exceed this low productivity baseline, it would signal a deeper economic malaise.
The Stakes for Labour
For the Labour government, robust economic growth is not just desirable but essential. Increased tax revenues are needed to fund ambitious plans to restore and enhance public services, from the National Health Service to transport, policing, and the judiciary. Achieving these goals without resorting to substantial borrowing hinges on sustained growth. Yet the margin for error is slim. If the Office for Budget Responsibility (OBR) revises its already optimistic productivity growth estimates downward, the government’s fiscal flexibility could shrink dramatically. Even a modest downgrade could wipe out tens of billions of pounds in borrowing capacity, jeopardising Labour’s agenda.
This precarious balance underscores the political stakes. Labour’s ability to deliver tangible improvements to public services will be critical for its prospects in the next general election. Without meaningful economic progress, the government risks falling short of voter expectations.
Looking Ahead
As 2025 unfolds, all eyes will be on the British economy. The surprising recovery in 2024 brought a sense of optimism, but sustaining that momentum is far from guaranteed. If growth falters, it will be a stark indicator of deeper systemic challenges that demand urgent attention. Conversely, if Britain can overcome its productivity woes and build on recent gains, it could mark the beginning of a more prosperous era. The stakes are high, and the coming year will be a critical test for Britain’s economic resilience and its government’s ability to deliver on its promises.