Key Takeaways
One of the biggest surprises in 2025 was that the Bank of England's interest rate cuts fell short of market expectations due to persistently high inflation. While the FTSE 100 performed strongly, consumer pressures weighed on multiple sectors of the UK stock market this year. The more domestically focused FTSE 250 index showed significantly weaker performance.
Core Analysis When assessing the UK's economic, corporate, and financial market performance in 2025, it’s easier to focus on what didn’t happen rather than what did. Most notably, the Bank of England’s rate cuts were far less aggressive than widely anticipated, while inflation also declined less than projected by the central bank and other institutions.
However, at the macroeconomic level, forecasts were largely accurate. Independent projections compiled by the UK Treasury showed that most institutions expected annual GDP growth to range between 1.3% and 1.5% at the start of the year. The final growth figures aligned closely with this range. Yet, despite persistent pessimism in commentary on the UK economy, market expectations barely shifted, as seen in last month’s comparative forecast report.
This broad assessment masked some noteworthy market trends. In Q1, UK GDP grew 0.7% year-on-year—a figure repeatedly highlighted by Chancellor Rachel Reeves as the highest among G7 nations. However, this strong performance was partly driven by exporters stockpiling ahead of US President Donald Trump’s tariff hikes. By mid-year, the UK economy reverted to its 2024 pattern—initial robust growth faded, and momentum slowed.
Q2 growth dropped to 0.3%, followed by a further decline to 0.1% in Q3. The latest September and October data showed a 0.1% month-on-month contraction for two consecutive months. This was partly due to a cyberattack on Jaguar Land Rover, the UK’s largest automaker, which slashed production, and partly due to a stagnant housing market and weak consumer spending ahead of November’s fiscal budget announcement. As a result, the UK economy saw no growth between May and October.
As 2025 draws to a close, the labor market is flashing warning signs. Unemployment has risen to 5.1%, the highest since January 2021. Additionally, a closely watched survey by the Recruitment & Employment Confederation (REC) revealed a 14.4% month-on-month drop in new job postings between October and November. This likely reflects employer concerns over Reeves’ November 26 budget. However, the decline is particularly surprising given seasonal hiring boosts in sectors like retail ahead of Christmas. The trend suggests that Reeves’ October 2024 decision to raise employer National Insurance contributions, which took effect in April, continues to negatively impact the job market.
Inflation Surprise The policy also fueled inflation—another major surprise of 2025. The Bank of England’s final quarterly inflation report last year projected CPI would "rise gradually over the next year, reaching around 2.75% in the second half of 2025." In reality, the Bank was only half right: inflation rose, but far more sharply than expected. By July, UK inflation hit 3.8%, holding steady for two months before easing slightly to 3.6% in October (November data will be released later today). Government policies were largely to blame.
The Bank’s latest monetary policy report noted: "We estimate that unusually large hikes in government-controlled prices, such as vehicle excise duty and sewage charges, contributed 0.4 percentage points to CPI inflation above target. Food, beverage, and tobacco prices added another 0.4 percentage points." It added: "The remaining 1 percentage point above target stems mainly from rising labor costs. Previous wage increases, combined with higher employer National Insurance contributions, pushed up services inflation and partly drove goods inflation."
While energy costs now suppress rather than boost inflation, other policy decisions will continue exerting upward pressure in 2026. These include a recent above-inflation hike in the national living wage, expected to further lift food and beverage prices, and an expanded sugar tax.
Stock Market Divergence Despite economic weakness, UK equities have fared well. With just six full and two half trading days left after today, the FTSE 100 has surged over 18% year-to-date, on track for its best annual performance since 2022 and only its third outperformance against the S&P 500 in a decade. However, the FTSE 100 poorly reflects UK corporate health, as its multinational constituents generate minimal domestic revenue.
The more UK-focused FTSE 250 tells a gloomier story, rising just 7% this year. Several prominent UK firms in the index have struggled. Travel retailer WH Smith plunged about 44% due to accounting irregularities. Bakery chain Greggs fell nearly 40% on weak sales growth fears, while Domino’s Pizza dropped around 43%. Discount retailer B&M, once a market darling, crashed over 53%. These declines underscore the financial strain on UK consumers in 2025—a trend likely to persist as expectations for 2026 rate cuts moderate.
UK Competes with Silicon Valley: Albion Ventures
Comments