Outlook for the UK Economy and SMEs for 2025

The UK’s economic outlook for 2025 presents a mixed picture, with modest growth projections tempered by persistent inflation and challenges for small and medium-sized enterprises (SMEs).

Economic Growth and Inflation

Goldman Sachs forecasts a 1.2% increase in the UK’s GDP for 2025, slightly below the Bank of England’s projection of 1.5%. This growth is expected to be influenced by uncertainties in international trade and domestic fiscal policies.

Inflation remains a significant concern, with the Organisation for Economic Co-operation and Development (OECD) projecting an average rate of 2.7% in 2025, the highest among G7 nations. This is attributed to strong wage growth and elevated services inflation.

Monetary Policy

In response to these inflationary pressures, the Bank of England (BoE) has begun adjusting its monetary policy. In November 2024, the BoE reduced its interest rate from 5% to 4.75%, marking the second cut since 2020. Analysts anticipate that the BoE will continue to lower rates cautiously throughout 2025, potentially reaching 3.75% by year-end.

SME Outlook

SMEs, which are integral to the UK economy, face a complex landscape. A survey by iwoca indicates that only half (51%) of small and medium-sized business owners feel optimistic about the country’s economic future, while two-thirds (66%) worry other economies are overtaking Britain. Rising costs and taxes are cited as primary concerns, with 42% of business owners listing it as a main concern. Despite these challenges, 71% of SME leaders expect turnover to grow this year, with 8% expecting it to shrink. Hiring plans are expected to match these growth ambitions, as over half (55%) of SMEs plan to expand headcount this year.

Additionally, a study by Aviva highlights widespread optimism among UK SMEs, with around nine in ten (89%) business decision-makers confident about their growth prospects for 2025. The study also reveals enduring optimism among SMEs, with 85% confident that their businesses will grow over the next five years.

Challenges Ahead

Despite these positive indicators, SMEs are grappling with challenges such as rising costs, increased taxes, and political uncertainty. The reduction in Business Rate Relief and higher employer National Insurance contributions have added financial strain, leading some long-standing businesses to close.

In summary, while the UK economy is poised for modest growth in 2025, SMEs must navigate a landscape marked by inflationary pressures, fiscal policy changes, and evolving market dynamics. Proactive adaptation and strategic planning will be essential for SMEs aiming to thrive in this environment.

As always, we are on a mission to help business owners to grow themselves and their businesses, for any tool, resource, ideas, experts look at www.the-growth-hub.com.

Patrick McCreesh

Founder

The Growth Hub

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