91探花

A week might be a long time in politics, but it’s been a heck of a fortnight for the economy and financial markets. The huge UK Autumn Budget, Donald Trump’s decisive victory in the US election, a rate cut by the Bank of England (BoE) (accompanied by a new set of forecasts) and an interest rate reduction in the US mean some of our forecast for next year, and the risks around them, need to be updated. 

We’ll be setting out all our views for next year in our next Quarterly Economic Outlook, which will come at the start of December -  an early Christmas present for you all! But here is a sneak preview of how things look now the dust has settled. 

First, because the budget was bigger and spending increases will come more quickly than expected, we’ve revised up our forecast for economic growth next year from 1.5% to 1.8%, that marks a big improvement from the 1% (ish) we’re likely to have had in 2024. Growth will then probably slow a little in 2026, to around 1.6%.

Second, since the budget represents a big injection of demand into the economy at a time when the unemployment rate is low, inflation will probably be higher. We now expect inflation to rebound from 1.7% currently to about 2.5% by the end of this year and then stay there through 2025, before gradually starting to fall in 2026. 

Third, stronger economic growth and higher inflation means interest rates will now fall more slowly. We now expect the BoE to cut rates once a quarter next year, rather than once a meeting. Indeed, on Thursday the Monetary Policy Committee (MPC) said that rate cuts would be slow and cautious – backing away from the comments made by Governor Bailey a few weeks ago that rate cuts could be more “aggressive”. That leaves interest rates at 3.75% at the end of next year. 

Until we have more information about the details of Trump’s new economic policies, we’re not making any firm changes but there are some broad things we can say. 

One is that a 10% tariff on UK exports to the US would probably reduce GDP by less than 0.1% and it’s possible that the impact could even be much less than this. About 22% of UK exports go to the US, but most of that is services exports, which could be exempted from tariffs. 

The impact on inflation in the UK depends on retaliatory tariffs imposed by the UK on US imports, which we assume would be relatively minor. Trump’s economic policies will probably lead to higher inflation and higher interest rates in the US, resulting in a stronger dollar. Assuming the pound fell by 5% against the dollar but was stable against all other currencies (because the dollar is rising against everything), then inflation would probably be about 0.3 percentage points higher in 2026. 

The upshot is that the developments over the last fortnight leave our forecasts for the economy, inflation and interest rates in 2025 higher. And the risks to the UK from the US election are clearly weighted to the downside. In fact, a trade war and higher inflation would bring back that dreaded word… “stagflation”. 

Sign up to our  for regular commentary and analysis from Tom on the changing economic landscape.