Economic growth forecast downgraded as uk firms face challenging year

Severe cost pressures are mounting on British businesses, prompting the British Chambers of Commerce (BCC) to downgrade the UK’s economic growth forecast for 2025. The lobby group now expects the economy to grow by 0.9% this year, a reduction from the previously predicted 1.3%, with slowed growth mainly driven by increased government spending.

The BCC also projects that gross domestic product will rise by 1.4% in 2026, down slightly from an earlier forecast of 1.5%. Rising inflationary pressures and escalating costs following the government’s autumn budget mean inflation is anticipated to remain above the Bank of England’s 2% target until late 2027. Businesses are now grappling with elevated taxation burdens and lingering uncertainty over a potential global tariff conflict.

Shevaun Haviland, Director-General of the BCC, emphasised that businesses cannot continue to shoulder these cost escalations. Speaking ahead of the Chancellor’s upcoming spring statement on 26 March, which is expected to introduce cuts to government spending, Haviland noted that the business environment is already challenged. The Chancellor has reportedly assured the business community that no further tax increases are planned after October’s budget.

David Bharier, the BCC’s Head of Research, highlighted the detrimental impact of higher costs on firms. He cautioned that the impending national insurance rise for employers, set to take effect in April, could push companies to halt investment plans and reduce workforce numbers. This, he warned, could curtail tax revenues as businesses adapt to these financial strains.

Inflation for the fourth quarter of 2025 is now forecast at 2.8%, up from a previous estimate of 2.2%. It is expected to gradually decline to 2.1% by the end of 2026 before finally hitting 2% in late 2027. The continued inflationary pressures are also expected to influence monetary policy, with the Bank of England maintaining a cautious approach to interest rate cuts. The base rate is forecast to remain at 4.25% by the end of 2025 and stabilise at 4% from 2026 onwards.

Unemployment is projected to rise to 4.6% by the end of this year, slightly higher than the previous forecast of 4.5%. According to the BCC, this increase results from businesses scaling back on recruitment due to the dual impact of elevated labour costs and slowing economic growth. Investment levels are also subdued, with business investment growth revised to just 0.6% for the current year. However, modest improvements are expected in 2026 and 2027, driven by a ‘crowding-in effect’ from increased public spending announced in the autumn budget.

The outlook for many UK firms remains uncertain, particularly as they face ongoing barriers to trade and rising operational costs. While certain sectors may benefit from emerging opportunities, including developments in artificial intelligence, smaller businesses are likely to require greater support to adopt and thrive in these new industries.