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Consumer Discretionary
The UK's economic landscape received a significant update with the release of the 2025 Spring Statement, where the Office for Budget Responsibility (OBR) announced a noteworthy downgrade in its GDP growth forecast for the year. The OBR adjusted its forecast from 2% in October 2024 to a more modest 1% in 2025, reflecting the ongoing challenges faced by the global economy. Despite this temporary setback, the OBR has expressed optimism regarding future growth, predicting higher GDP growth rates from 2026 onwards.
The OBR's downward revision for 2025 reflects the current economic uncertainties, including rising interest rates and inflation. However, the OBR has also enhanced its forecasts for subsequent years, predicting GDP growth of 1.9% in 2026, 1.8% in 2027, and maintaining a growth rate of 1.7% in 2028 before rising to 1.8% in 2029[1][5]. This indicates a potential rebound in economic performance in the coming years.
Inflation is expected to average 3.2% in 2025 before decreasing rapidly to hit the Bank of England's target of 2% by 2027[1]. The higher interest rates, which have been a global trend, are set to continue, impacting the cost of government borrowing and adding complexity to fiscal management[4].
A key highlight of the Spring Statement was the announcement to increase NATO-qualifying defence spending to 2.5% of GDP by 2027. This significant rise is funded partly by reducing overseas aid from 0.7% to 0.3% of Gross National Income[3][5]. This strategic reallocation aims to enhance national security while managing fiscal responsibilities.
The government has committed to investing £13 billion more in capital infrastructure over the next five years, alongside a construction skills package to train up to 60,000 additional skilled workers[2]. Furthermore, an additional £2 billion is allocated for social and affordable housing, supporting the government's goal to build 1.5 million homes in England during this Parliament[2].
Ambitious planning reforms are expected to have a substantial positive impact on the economy. The OBR estimates that these reforms will increase real GDP by 0.2% by 2029-30, adding £6.8 billion to the economy, and further by over 0.4% by 2034-35[2][3]. This policy change is seen as a critical driver of growth without incurring additional fiscal costs.
Despite these efforts, higher borrowing costs and inflation pose significant risks to meeting fiscal rules. The OBR has noted that maintaining current budget surpluses and reducing public sector net financial liabilities (PSNFL) as a percentage of GDP remains challenging[5]. The government must balance its spending and revenue strategies carefully to ensure compliance with fiscal rules.
The OBR projects real wages and real household disposable income (RHDI) per capita to rise by 2.2% and 2.6%, respectively[2]. However, these gains might be tempered by welfare cuts and other factors affecting household finances[4]. The government's policies aim to boost living standards but face challenges from broader economic conditions.
Cuts to welfare benefits, including disability benefits, are anticipated to lower real household disposable incomes slightly, though these impacts are expected to be somewhat offset by stronger real wage growth and planning reforms[4].
The 2025 Spring Statement presents a mixed bag of economic challenges and strategic investments. While the immediate growth forecast is less optimistic, long-term prospects appear more robust, driven by infrastructure investments and economic reforms. As the UK navigates global uncertainties, maintaining fiscal discipline and enhancing economic resilience will be crucial in the years ahead.
