The UK economy 2025 faces slowing job growth, rising unemployment, and persistent inflation. Will the Bank of England cut interest rates? Here’s what you need to know.
A Shifting Labour Market: Unemployment Rises
As of July 2025, one of the most pressing concerns in the UK economy is the cooling labour market. According to the Office for National Statistics, the unemployment rate rose to 4.7%, the highest in over three years. The number of payroll employees has fallen by more than 170,000 compared to the previous year, showing the sharpest decline since the post-COVID period.
The number of job vacancies has also dropped for the ninth consecutive quarter, signalling that businesses are reluctant to hire amid economic uncertainty and rising operational costs.
For job seekers and employers alike, this trend reflects a broader economic slowdown.
Wage Growth Slows While Costs Stay High
Another key trend is slowing wage growth. Private sector pay growth has dropped to 5.0%, down from 6.5% earlier in the year. While this might seem like a sign of stability, it’s not keeping up with the cost of living for many UK households.
Inflation remains stubbornly high, with the Consumer Prices Index (CPI) rising to 3.6% in June 2025. The main drivers? Soaring food prices, rising energy costs, and increased taxes on services.
This disconnect between income and expenses is putting significant pressure on household budgets, especially for renters, young professionals, and families with children.
Businesses Struggle: Hospitality & Retail Hit Hard
Small businesses, particularly in the hospitality and retail sectors, are feeling the squeeze. The combination of higher National Insurance contributions, minimum wage increases, and reduced consumer spending has led to a wave of closures and redundancies.
Though insolvency figures dipped slightly in June, analysts warn this could be seasonal and not a long-term recovery. Many SMEs are calling for government relief or support to survive the second half of the year.
Will the Bank of England Cut Interest Rates?
With unemployment rising and economic growth stagnating, the big question now is: Will the Bank of England cut interest rates in 2025?
As of mid-July, market analysts expect a potential rate cut in August, possibly from 4.25% to 4.00%. This would be the first rate reduction in nearly two years.
While inflation remains above the 2% target, central bankers are becoming increasingly concerned about weaker demand and job losses. Some, like MPC member Catherine Mann, are urging caution—but the data may force action sooner than expected.
GDP Growth Slows But Avoids Recession… For Now
UK GDP contracted by 0.1% in both April and May, according to early estimates. However, Q1 data showed positive growth of 0.7%, meaning a recession has not yet begun.
Economists at ING and Oxford Economics forecast modest full-year growth of around 1.2%, with risks tilted to the downside due to global supply chain disruptions, high interest rates, and reduced business investment.
Outlook: Mixed Signals, Uncertain Future
In summary, here’s what you need to watch:
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🔺 Unemployment is rising, signalling a weaker job market.
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💰 Wage growth is slowing, while living costs remain elevated.
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🏘️ Businesses are under pressure, especially in labour-intensive sectors.
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📉 Rate cuts are likely, but timing remains uncertain.
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📈 Inflation remains sticky, complicating monetary policy decisions.
The UK economy in 2025 is at a critical crossroads. The coming months will reveal whether the Bank of England can bring inflation under control without tipping the economy into recession.