The economy of the United Kingdom has endured a rough few years since the peak of the Covid-10 pandemic, with the manufacturing sector of the country suffering massively, translating in thousands of job losses and a sluggish growth, with many economists fearful of persistently high inflation and a potential recession on the cards. 

Such negative outlooks have also shaped the attitude towards the Great British pound (GBP) on the global forex market, particularly in relation with the United States dollar (USD). 

What can consumers expect from the UK economy heading into 2025 and could the country finally curb inflation before the end of 2025? - To understand this and how inflation is likely to affect the UK economy as a whole, we must consider the core issues plaguing the economy and how likely they are to be addressed over the course of the year 2025. 

Why is the UK economy struggling?

Brexit is what comes to mind for most readers when discussing the woes of the UK economy. However, excessive bureaucracy and a crisis of local government have also played a key part in the hollowing out of the UK middle class, which has meant that much of the UK’s economic growth is driven by the activity in the Greater London area, while other regions of the country have lagged behind. 

High energy prices have been a particular challenge for the UK manufacturing sector, which has in turn reduced the volume of the country’s exports, hurting economic growth figures. 

The GDp growth rate for the year 2023 was only 0.10%, which is one of the lowest figures in the UK since the 2008 financial crisis.

Going forward, investors and analysts are not particularly bullish towards the prospects of the UK economy in the coming years, which exacerbates the attitudes of the local population in the process as well. 

GBP inflation and predictions for 2025

The Great British pound has endured a period of high inflation, which was primarily due to the Covid-19 pandemic and its effects on the global economy as a whole, coupled with the energy crisis brought about by Russia’s invasion of Ukraine. For this reason, the annual inflation rate for the GBP reached a staggering 9.5% in 2022, the highest inflation rate seen in decades.

2023 inflation was lower at 6.9%, 5% in 2024 and the OECD forecasts an annual inflation rate of 3.4% for the year 2025. 

While the inflation rate has shown considerable recovery over the past 3 years, it is still higher than the 2% targeted by the BoE, which puts a further strain on the UK economy, with heavy industries taking the brunt of the damage.

It is also worth noting that by some estimates, the GBP inflation rate may be lower than the OECD prediction and arrive at a value between 2.7% and 3% annually. 

When discussing UK inflation figures, it is also important to consider the currency correlation between the GBP and other major currencies, particularly the USD and EUR. 

For example, GBP has a moderately negative correlation with the USD, which means that the currency underperforms when the USD is gaining strength, which is likely to happen as the Federal Reserve battles inflation caused by the reshoring of the U.S. manufacturing capacity.

Therefore, GBP is likely to lose more ground against the USD in the future and investors may see signs of this taking shape over the course of 2025 as well. 

Could the UK economy make a comeback?

While the short-term prospects of the UK economy seem dire, the long-term expectations for the country are also rather mixed, with some analysts expecting a recession and possibly a depression, while others expecting a trade deal with the United States, which would provide much needed relief for the economy. 

2025 is more likely to further the economic stagnation of the country, while inflation falls lower, providing consumers with a bit of relief in the coming years. However, the overall health and structural problems that have plagued the UK are unlikely to change drastically over the course of 2025. 

Conclusion

The UK economy has experienced stagnant growth since the Covid-19 pandemic, which has been exacerbated by a housing crisis and rising energy prices, which has meant high inflation in the country in recent years.

While the OECD expects a lower inflation rate for the year 2025, the overall health of the UK economy, as well as the standing of the GBP on the global market, is shaky at best. 

Going forward, prices are likely to see a 3% rise in the UK, with the inflation rate gradually going down to the targeted 2% figure. However, many analysts believe that structural issues and overreliance on London as an economic driver is unlikely to ease the pressure on the country in the long run.