UK economy grew by just 0.1% in the fourth quarter of 2025

The UK economy grew by just 0.1% in the final three months of 2025, according to new GDP figures announced by the Office for National Statistics (ONS) this week. Economists had expected a slightly higher 0.2% increase, though the recorded rise does mirror the third quarter of 2025, which also saw 0.1% growth.

The UK's growth figure was limited by a stagnating services sector, a shrinking construction sector and falling business investment, but balanced by growth in the production sector.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: "These figures confirm that the UK economy ended 2025 with a whimper.

"Businesses had a particularly bleak quarter as the dark cloud of uncertainty caused by the budget and higher costs severely curtailed trade and investment plans."

What is the current state of the UK economy?

Across the whole of 2025, the UK economy grew by 1.3%. This was below the Bank of England's 1.4% estimate and the 1.5% prediction from The Office for Budget Responsibility (OBR), but higher than the 1.1% recorded for 2024. The OBR forecast GDP growth to be 1.4% in 2026.

The latest monthly growth data showed a 0.1% increase for December 2025 and a revision to the November 2025 figure, down to 0.2% from 0.3% growth.

However, there is an expectation that increased business investment and boosted consumer confidence will translate into improved growth at the start of 2026. Economists are anticipating a growth figure of 0.4% for the first quarter of 2026, though the bounce-back continuing through the year will depend on political decisions and broader economic movements.

Why has the UK economy grown so little?

The growth we have seen has been put down to greater industrial production, with the sector growing by 1.2%. However, this is in the context of a 2.1% fall in construction output - its worst performance in four years according to the ONS - and zero growth in the services industry.

The lack of movement in the dominant services sector is key, as it forms such a considerable part of the UK economy, as much as 80% by some estimates. The stagnation is partly explained by sluggish consumer spending, which rose just 0.2% for the last three months of 2025, and a fall in business investment, which was down 2.7%.

The numbers back up the widely-held opinion that economic activity had slowed in the run-up to the Autumn Budget in late November, with households putting off spending and companies holding back investment decisions as speculation swirled over whether the chancellor would implement tax rises - and who those increases might impact.

Liz McKeown, the director of economic statistics at the ONS, said: "The economy continued to grow slowly in the last three months of the year, with the growth rate unchanged from the previous quarter.

"The often-dominant services sector showed no growth, with the main driver instead coming from manufacturing. Construction, meanwhile, registered its worst performance in more than four years."

What does low economic growth mean for interest rates?

The Bank of England's Monetary Policy Committee (MPC) will next meet on 19th March 2026 to decide whether the base rate of interest should change. At its last meeting on 5th February 2026, the MPC voted by a slim 5-4 majority to hold the rate at 3.75%.

The disappointing economic growth for the final quarter of 2025 could change market expectations, but at the time of writing, a quarter-point cut by June is fully priced in, along with a further quarter-point cut by the end of the year. The swaps market is currently giving a 60% chance of a 0.25 point cut in March.

Further slow economic growth could actually lead to a faster pace of cuts, as the Bank would likely see the need to lower rates to stimulate the economy. More significant growth in 2026 would mean the Bank would have less need to lower rates to stimulate the economy - potentially risking higher inflation - if the economy is already growing.

Where will interest rates go in 2026?

The trajectory of interest rates in 2026 will depend on the performance of the UK economy and the rate of inflation. Food and energy prices are expected to help temper inflation in 2026, so the cost of borrowing could depend on how the economy performs throughout the year. A strong economy would likely reduce pressure on the Bank of England to cut rates, while a weak economy could prompt faster and more frequent rate cuts.

Ruth Gregory, deputy chief UK economist at Capital Economics, said: "Overall, we still think the economy will grow by just 1% this year."

Continued sluggish growth, combined with inflation settling around the Bank's 2% target, could be enough for cuts to the base rate to come sooner and potentially even be sharper than the quarter-point increments widely expected.

If you are interested in learning more about where interest rates might go in the future, check out our article on the latest UK interest rate predictions.

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