UK households and businesses navigated a turbulent 2025 marked by tax increases, a US trade war, and significant job cuts, partially cushioned by four interest rate reductions. The year closed with a mixed economic outlook and forecasts pointing to sluggish growth continuing into 2026, despite some anticipated improvements in consumer confidence.
Chancellor Rachel Reeves implemented national insurance contribution increases alongside a significant minimum wage rise in April, creating a double financial burden for businesses. Food and drink manufacturers bore the brunt, facing costs nearly 40% higher for ingredients and energy compared to January 2020. Karen Betts, chief executive of the Food and Drink Federation, said earlier this year: «Food and drink manufacturers are paying nearly 40% more for ingredients and energy than they were in January 2020, as well as bearing a range of newer regulatory costs, like new packaging taxes and increases to employer national insurance.»
Businesses responded by passing expenses to consumers through price rises, driving inflation to an annual peak of 3.8% in summer. Food and drink inflation reached 4.9% by October, reversing the previous year's downward trend. Betts added: «Hard-pressed food and drink companies are finding they simply have no choice but to increase prices.»
Many firms cut jobs due to wage bill pressures. The unemployment rate climbed to 5.1% in the three months to October, the highest level in more than four-and-a-half years and nearly a decade outside the Covid era. Amazon announced around 14,000 corporate job cuts worldwide in October, attributing them to artificial intelligence.
Interest rate relief amid weakness
The Bank of England delivered four interest rate cuts throughout 2025, bringing the base rate down from 4.75% at the start of the year to 3.75% by December. Over a million mortgage borrowers benefited from the reductions.
However, the cuts also signaled underlying economic weaknesses. The central bank predicted the economy would flatline in the final three months of 2025, with uncertainty over tax hikes before the November 26 budget holding back growth in the fourth quarter.
US trade war hits exports
US President Donald Trump's second term, which began in January, brought immediate challenges. His "liberation day" tariffs announced in April imposed a 10% blanket tariff on most UK goods, causing a sharp slowdown in economic growth and a record drop in UK exports to America that month.
Subsequent trade deals with the US helped the economy recover, leading to upward revisions of initial GDP forecasts. The Office for Budget Responsibility upgraded its growth outlook to 1.5% from 1% in November.
Consumer confidence remains fragile
Despite personal financial security, UK consumers remain reluctant to spend entering 2026, according to a KPMG consumer pulse survey of 3,000 people. The study found 56% feel secure in their personal finances, down only marginally from 57% at the beginning of 2025.
However, concern about the UK economy's health grew sharply during the year. The KPMG report stated: «But concern about the health of the UK economy grew during 2025, starting the year with 43% saying that the economy is worsening and ending the year at 58%.» This perception is set to continue into 2026, particularly affecting discretionary spending on eating out and big-ticket items like cars and furniture.
Opposition parties accused Reeves of increasing uncertainty and dampening confidence by delaying the budget to November. The Chancellor faced criticism for leaks and Treasury briefings that triggered speculation about extra taxes on higher earners and retirees.
Mixed outlook for 2026
The November budget, despite shelving an income tax hike, disappointed many businesses by offering little stimulus for growth. Matt Swannell, chief economic adviser at EY Item Club, warned that «another year of sluggish growth for the UK economy is expected in 2026».
Some analysts predict a slow lifting of economic gloom. Elliott Jordan-Doak from Pantheon Macroeconomics expressed optimism: «The improvement in consumers' confidence – likely off the back of the Chancellor shelving an income tax hike – bodes well for consumer spending.» He added: «GDP growth should accelerate in the first quarter, with the Budget now in the rear-view mirror.»
An HM Treasury spokesperson responded to the survey findings: «Real wages are up more in the first year of this government than the first decade under the previous government and living standards are higher than they were in the previous parliament meaning people have more money to go out and spend.» The spokesperson highlighted budget measures including increases to the national living wage and minimum wage, £150 off energy bills, and frozen rail fares for the first time in 30 years.
Note: This article was created with Artificial Intelligence (AI).
