UK GDP eked out growth of 0.1 per cent in the final three months of 2025 (chart 1), the same pace of increase as Q3. This took full year 2025 growth to 1.3 per cent, a shade better than 2024 (1.1 per cent) and better than growth of less than one percent that many were expecting at the start of the year. 

Across 2025, spending by households and government as well as an increase in gross capital formation (GCF) all contributed to growth, and within GCF business investment also made a positive contribution. The increase in household spending last year was muted, but nevertheless the first year of growth since 2022. The UK’s net trade performance, however, continued to pose a significant drag on growth. Imports expanded at a faster pace than exports, knocking nearly one percentage point off growth – the biggest fall in net trade since 2014. Apart from an increase in business investment, the profile of GDP in Q4 was consistent with the year as a whole.

Cutting Q4 output by sector, manufacturing recovered the losses in Q3 due in large part to the effects of the Jaguar Land Rover cyber-attack. Services output was flat over the quarter, representing the weakest quarterly outturn for two years. Consumer-facing services did a bit better, with output expanding by 0.2 per cent, but this was offset by large falls in business-to-business related sectors, such as professional and technical activities, which had been faring better in the first half of the year. 

However, the main weakness across the three broad sectors, was construction, where output dropped by more than two per cent on the quarter – the worst performance in more than four years. There were weak readings across repair and maintenance, and new work, notably housing. This is not unexpected given the weakness of recent surveys, such as the purchasing managers’ index. And, unlike manufacturing and services for which surveys have started 2026 on a more positive note, construction activity remained depressed in the early months of this year.

Unemployment drifted steadily higher through 2025, from 4.4 per cent in January to end the year at 5.2 per cent. This was the highest rate (excluding the pandemic) for over a decade. While business surveys have been pointing to weaker recruitment intentions over the past year, a bigger driver of the increase in the unemployment rate has been a rise in outflows from inactivity to unemployment. 

The Bank of England’s analysis of the labour market in its February Monetary Policy Report (MPR) also notes that the Agents’ network report that firms are managing headcount through natural attrition rather than redundancies and around half the increase in unemployment in the past couple of year has been short-term, with workers moving back into work. In addition, vacancies, which had been sliding since mid-2022, look to have stabilised in recent months.

However, a key takeaway from the latest ONS release was the big rise in unemployment amongst younger workers. The unemployment rate for those under 25 years hit 14 per cent in December, the highest rate since mid-2015. A number of factors are in the frame for the increase – the increasing adoption of AI in some industries reducing demand for entry-level jobs and depressing graduate recruitment, hesitancy amongst employers ahead of the incoming employment rights act, and the impact of recent increases in the minimum wage. 

At a recent roundtable with business groups, one representative noted that the productivity equation doesn’t stack up for some smaller businesses, with recruitment costs outweighing the productivity of newer, younger workers. Government have signalled that it will consider the speed at which it plans to align the different minimum wages rate, given the potential impact on employment for this cohort. 

Across the labour market as a whole, the Bank has revised up its forecast for unemployment this year to an average of 5.3 per cent (from five per cent in November). The ONS data also indicated a further slowdown in wage growth at the end of the year. If sustained, and together with the predicted slowdown in inflation (see next) the next interest rate cut may come sooner rather than later. 

After inflation picked up again at the end of last year, seasonal increases, notably higher airfares, unwound in January and CPI dropped back to three per cent – the lowest rate since March 2025.  In addition to the drop in airfares, food and drink inflation eased in January. Core inflation dropped back to 3.1 per cent – the lowest rate since September 2021 and services inflation edged down to 4.4 per cent. 

Forecasters, including the Bank of England, now expect this to be the start of a sustained decline back to the two per cent target this year. February’s MPR updated the Bank’s expected profile for CPI over the next three year (chart 3) and it now expects a sharper fall back to target from 2026 Q2 compared with its November forecast. 

The report cites three key drivers of the expected fall;

• The main contributor to the fall, which also underpins the difference with the previous forecast, is the energy bills package in the autumn Budget which removed green levies from bills. This will shave around 0.4 percentage points off CPI in Q2.
• A reduction in the contribution from administered and regulated prices is expected to support near-term disinflation.
• Thirdly, the Bank expects a broad-based slowing in other CPI components, including a moderation in the impact from last year’s NICs increase on services inflation.

The February Monetary Policy Committee (MPC) minutes again noted upside and downside risks to the medium-term outlook for inflation. Despite expected falls inflation expectations remained high which could push up on wage growth. Alternatively, a notable slowing in food inflation, for example, could help bring down expectations and the weaker labour market and demand outlook may see inflation undershoot target. These have been the prevailing tensions in recent meetings. 

Since the February meeting, the labour market data, as noted above, has come in somewhat weaker than expected. Assuming we see more of the same in the coming months, the next Bank Rate cut is expected to come in the spring.

The flash productivity estimate from ONS from the final quarter of 2025 paints a pretty miserable picture of the UK’s performance (chart 4). Output per hour was 0.5 per cent lower in the final three months of the year compared with the same period in 2024. ONS analysis shows this to be below medium-term trends, which has also been a sustained period of sub-par productivity growth compared with the UK’s performance pre-financial crisis. 

The ONS data provides a more detailed sector breakdown for productivity by sector up to Q3 2025. Three sectors have been dominant in driving productivity growth relative to pre-Covid levels (2019 average) – information technology, manufacturing, and professional and technical services. Some common characteristics of these industries are the investment and R&D intensive nature of firms, and a relatively higher degree of international exposure. At the other end of the spectrum, finance and insurance, and health and social care have made the largest negative contributions to productivity. 

While the ONS is still undertaking improvements to its labour market data, which could lead to some revisions to recent productivity trends – the recent MPR suggest that underlying productivity is likely to have been stronger than suggested by the data. However, this alone would not address a now 15 year debate about the underlying causes of sustained productivity weakness in the UK.

Both Bank of England and OBR autumn 2025 forecasts assume some modest recovery in productivity in the coming years. Growth in capital deepening, supported by a steady increase in investment could play a role, helped by lower borrowing costs and accelerated investment in technology, particularly AI. The rate of uptake here feels uncertain. In addition, significant global investment in AI development and adoption isn’t yet showing up in the productivity data. 

Business investment posted a fifth year of growth in 2025, but it is not a consistent picture across the economy. In the first nine months of the year (for which data is available) the sectors supporting higher investment levels were concentrated in transport and storage, ICT, engineering and vehicle manufacture. 

While there are expectations for some further growth in investment in the year ahead, the ONS Business Conditions survey continues to point to some caution (chart 5). The net balance of firms planning to increase investment in the next three months (excluding n/a) has been just about holding in positive territory in the post-pandemic period. We see from other surveys (such as the Ipsos SME Finance Monitor) that economic and political uncertainty as well as heightened cost pressures have been front of mind for businesses over this period and will likely have increased reticence among firms to ramp up investment. 

Bank of England data has indicated a bit more borrowing activity by SMEs over the past year, and we’ve seen similar trends in lending by the main high street lenders in UK Finance data. As we noted last month, business confidence has ticked higher since the start of the year. But with the renewed trade policy uncertainty following the US Supreme Court Judgement on President Trump’s tariffs, policy risks remain.  

In February our quarterly Arrears and Possession data confirmed the steady decline in mortgage arrears in Q4 2025. Our Q4 Later Life Lending dashboard was also published in February. The full round-up of household finances was published on 2 March. 

Our Business Finance Review covering lending to SMEs in 2025 will be released on 12 March. 

All our data releases can be found here, with full member data available on the UK Finance portal. 

Source: ONS, HM Treasury, Bank of England, EIA

*Q4 2026