The United Kingdom’s economy presents a puzzling paradox in the latest global outlook, combining stronger-than-expected growth with a forecast for the most persistent inflation among its G7 peers. This year’s GDP growth has been revised up to 1.3%, making the UK the second fastest-growing economy in the group.
However, this positive data point is severely undercut by a grim inflation forecast. A major financial body predicts UK inflation will average 3.4% in 2025 and remain the highest in the G7 through 2026. This has prompted pointed advice for the Bank of England to hold off on interest rate cuts, with officials noting that strong wage growth and public expectations are keeping price pressures high.
The UK’s situation is a reflection of a wider global theme of “unexpected resilience” coupled with deep-seated uncertainty. The world economy’s growth forecast for this year was also lifted, to 3.2%, as the immediate blow from US tariffs was softer than feared. But the report warns this is a temporary lull before a “dim” outlook takes hold.
Two other major risks are detailed in the report, which will have knock-on effects for the UK. Firstly, restrictive immigration policies, particularly in the US, are seen as a drag on global growth and a source of inflation. Secondly, “stretched valuations” in the stock market, driven by AI optimism, are flagged as a potential trigger for a sharp investment downturn.
In essence, while the UK’s Chancellor can point to positive growth figures for this year, the underlying message from the global economic community is one of caution. The combination of high inflation at home and significant risks abroad creates a challenging path forward for British policymakers.