Deutsche Bank has revised its economic forecast for the UK down, showing a slower growth trajectory in 2025.
In a note released on Tuesday, the bank forecast GDP growth of 1.3% for the year and 1.4% for 2026, both two-tenths lower than its previous forecast. Weak private sector demand, higher wage costs and lackluster job growth are the main factors shaping the outlook.
“Loose fiscal policy is likely to reduce private sector spending. Weaker private demand and rising wage costs are likely to lead to lower job growth and wage settlements. Higher prices, albeit temporary, are expected,” Deutsche Bank senior economist Sanjay Raja said in the note.
The UK labour market is expected to soften further. Deutsche expects the unemployment rate to peak at 4.6% by the end of spring, driven by a lack of job vacancies and rising employer costs. Wage growth is expected to moderate, with the average wage settlement rate declining to 3.75%-4% in 2025 and 3%-3.25% in 2026, compared to 5.5% in 2024.
Deutsche also expects inflationary pressures to persist, with headline CPI rising to 2.9% in 2026, compared to 2.5% in 2024.
The report states that inflation will return to the Bank of England’s 2% target by 2026.
In addition, Deutsche Bank predicts that UK fiscal policy will remain restrictive, leading to a reduction in medium-term spending plans as outlined in a forthcoming statement. However, delays in multi-year spending reviews could lead to increased borrowing or small tax adjustments.
On the monetary policy front, the bank expects a slower pace of easing, with the Bank of England cutting interest rates four times compared to five in 2025. The first rate cut is expected to occur in the first half of the year, with further cuts concentrated in the second half. Deutsche Bank maintains its forecast for bank rates to reach 3.25% by the first quarter of 2026.
