UK Economy Shows Modest Growth in Q4 2025
The UK economy expanded by 0.1% quarter-on-quarter in the fourth quarter of 2025, according to final GDP data released on Tuesday. The figure matched initial estimates and highlighted ongoing weakness in private sector activity ahead of the escalation of the Iran conflict.
Public Sector Supports Growth as Private Activity Declines
A closer look at the data reveals that public sector activity increased during the quarter, while private sector output contracted. Consumer spending rose by just 0.1%, revised down from an earlier estimate of 0.2%.
Business investment declined by 2.5% quarter-on-quarter, showing a slight improvement from the previous estimate of a 2.7% drop. Meanwhile, net trade weighed on overall growth, subtracting 0.5 percentage points from GDP.
Annual GDP Revised Slightly Higher
Due to rounding adjustments, full-year GDP growth for 2025 was revised up slightly from 1.3% to 1.4%, offering a marginally stronger picture of the economy over the year.
Household Income and Savings Show Mixed Trends
Real household disposable income increased by 1.3% quarter-on-quarter in Q4, while the household saving rate rose from 9.1% in Q3 to 9.9%.
However, on an annual basis, real household disposable income still declined by 0.5% in the year to Q4 2025, reflecting underlying financial pressures on consumers.
Outlook: Growth Risks Rise Amid Inflation Pressures
The data precedes the spike in energy prices triggered by the Iran war in late February, which is expected to further impact economic conditions.
Capital Economics forecasts GDP growth of around 0.3% in Q1 2026, but expects limited expansion beyond that. Rising inflation is likely to weigh on household incomes, with real disposable income projected to fall by approximately 0.5% in 2026 after increasing 0.9% in 2025.
Slower Growth Expected with Recession Risks
The firm expects UK GDP growth to slow to just 0.5% in 2026, compared to 1.4% in 2025. In a more pessimistic scenario, growth could fall to 0.3%, raising the possibility of a mild recession.
This outlook contrasts sharply with stronger post-pandemic growth, when GDP expanded by 8.5% in 2021 and 5.1% in 2022 amid global energy shocks.
