The United Kingdom economy expanded by only 0.1% in the third quarter of 2025 while unemployment climbed to 5%, raising concerns about an impending recession just two weeks before Chancellor Rachel Reeves delivers her autumn budget.
The Office for National Statistics (ONS) reported Thursday that the economy grew 0.1% in the July to September period, down from 0.3% growth in the second quarter and below economist expectations of 0.2%. The unemployment rate accelerated to 5% for the three months ending September, the highest level since February 2021.
The combination of stalled economic momentum and rising joblessness has intensified fears that Britain is entering a fragile period ahead of Reeves’ November 26 budget, which is widely expected to include significant tax increases. On an annual basis, the economy grew 1.3%, down from 1.4% in the second quarter.
Liz McKeown, director of economic statistics at the ONS, stated that growth slowed further in the third quarter with both services and construction weaker than in the previous period, while production showed another contraction.
The economy shrank by 0.1% in September alone, following zero growth in August, which was revised down from an initially reported 0.1% expansion. Manufacturing drove much of the weakness, particularly a severe drop in car production linked to a cyberattack on Jaguar Land Rover (JLR).
The manufacture of motor vehicles, trailers and semi trailers plunged 28.6% in September, reflecting the impact of a cyber incident that halted JLR production for five weeks, alongside declines in the pharmaceutical industry. The cyberattack alone subtracted approximately 0.17 percentage points from GDP in September and 0.06 points for the entire quarter.
The weak growth figures arrive as Reeves prepares a budget that many economists expect will be among the tightest fiscal statements in recent years. Speaking to BBC Radio 5 Live on November 10, Reeves acknowledged the government faced a stark choice between sticking to tax promises made during the election campaign or risking deep cuts to investment in key national projects.
Labour’s 2024 manifesto explicitly promised not to increase National Insurance, value added tax (VAT), or income tax for working people. However, Reeves suggested this week that global challenges and persistent inflation have changed the economic landscape since those commitments were made.
Speculation has intensified about a potential income tax increase of 2 pence on every pound, which would represent the first direct income tax rise in roughly 50 years. Treasury officials are also reportedly considering removing the temporary 5 pence per litre fuel duty reduction introduced in 2022, which could generate around £2.7 billion in additional annual revenue.
Market analysts now view a December interest rate cut from the Bank of England (BoE) as increasingly likely. Rob Wood, chief UK economist at Pantheon Macroeconomics, said the third quarter growth data all but seals a December rate cut when added to the weak jobs data released earlier this week.
The BoE held its key interest rate unchanged at its November meeting as annual inflation remained well above the central bank’s 2% target, standing at 3.8% in September. However, Wood believes a likely contractionary budget on November 26 will dominate the Monetary Policy Committee’s deliberations when it meets December 18.
Markets are currently pricing in an approximately 80% probability of a quarter point rate cut in December, according to CME Group’s FedWatch tool. The BoE has previously stated it expects the economy to expand by 1.5% in 2025.
The services sector, which accounts for the largest portion of Britain’s economy, grew 0.2% in the third quarter, while construction increased 0.1%. The production sector fell 0.5%, driven primarily by manufacturing weakness. Real GDP per head showed no growth in the latest quarter, though it remained 0.8% higher compared to the same quarter a year ago.
Chancellor Reeves responded to the latest growth figures by highlighting that Britain had the fastest growing economy among Group of Seven nations over the first half of 2025. She said her budget would involve fair decisions to build a strong economy, though she declined to specify which taxes might increase.
In her November 4 speech setting the scene for the budget, Reeves said she must face the world as it is, not the world she wants it to be, referencing global challenges including supply chain issues, tariffs and high government borrowing costs. She noted that governments have historically taken the easy option to cut investment in rail and road projects, energy projects and digital infrastructure.
The Office for Budget Responsibility is expected to cut its productivity growth predictions for the next five years when it releases updated forecasts alongside the November 26 budget. The fiscal watchdog’s assessment will be crucial in determining how much fiscal headroom Reeves has to work with.
Retailers have warned against potential tax increases that could affect their businesses. Helen Dickinson, chief executive of the British Retail Consortium (BRC), stated that supermarkets are doing everything possible to keep food prices affordable, but face an uphill battle with over £7 billion in additional costs in 2025 alone.
Reports suggest the government is considering a business rates surtax on large commercial properties from April 2026, a move that major retailers have lobbied against. Other rumored measures include changes to inheritance tax, capital gains tax, pension tax relief and gambling duties.
Former Prime Minister Gordon Brown has led calls for online gambling levies to rise from 21% to as high as 50%. Reeves told ITV News in September that she had launched an inquiry into gambling taxation and would set out plans in the budget.
The UK financial sector has also expressed concerns about potential tax increases. Lobby group UK Finance is reportedly preparing arguments that higher levies would harm competitiveness, with senior executives at Goldman Sachs having privately cautioned Reeves against sector specific tax rises last month.
Some potential budget measures could support growth rather than constrain it. The government is reportedly considering exempting new UK stock listings from stamp duty for their first three years on the market. Investors currently pay 0.5% stamp duty on UK share purchases, a levy that runs counter to Reeves’ stated aim of reviving the London stock market.
The weak economic data has added pressure on the pound sterling, which has underperformed against major currency peers. The currency fell following the GDP release, with traders expressing concern that the combination of slow growth and potential tax increases could further dampen business confidence and consumer spending.
Scott Gardner, investment strategist at JPMorgan Personal Investing, said all eyes will now be on the upcoming budget, with another weak GDP reading only adding to debates around which levers the chancellor can pull to stimulate growth. He suggested that boosting housing market activity is key to unlocking decent, sustained growth.
The government’s economic challenges are compounded by rising unemployment and softening wage growth. The unemployment rate’s climb to 5% represents a shift from 4.8% reported earlier this year, suggesting the labor market is losing momentum after a long stretch of resilience.
Private sector data during the third quarter showed job losses averaging more than 11,000 per week through late October, according to some estimates. The Chicago Federal Reserve’s real time unemployment estimate suggested a slight rise from September, pointing to cooling conditions in the labor market.
Looking ahead, economists surveyed by HM Treasury in September suggested that UK GDP growth would continue to face headwinds. The EY ITEM Club upgraded its forecast for UK GDP growth in 2025 from 1% to 1.5% in its autumn forecast, but predicted a slowdown towards the end of 2025 and into 2026 due to anticipated fiscal tightening.
The consulting group forecasts UK GDP will grow by just 0.9% in 2026 before accelerating to 1.3% in 2027. Business investment growth is expected to slow to 0.8% in 2026, partially due to uncertainty in the global economy and the challenging worldwide trading environment caused by tariffs.
Matt Swannell, chief economic advisor to the EY ITEM Club, noted that to meet its fiscal rules, the government will need to reduce borrowing by up to £30 billion by increasing tax revenue or making spending cuts. He said some of these changes would need to be introduced almost immediately.
The November 26 budget represents a critical moment for Reeves and the Labour government, which returned to power in July 2024 after 14 years of Conservative rule. The party has struggled to consistently grow the economy since taking office, with many analysts attributing recent weakness to business uncertainty about potential tax increases.
Reeves has defended her first budget from October 2024, which included significant tax rises on businesses and wealthy individuals. She argues these measures have helped stabilize public finances, cut National Health Service (NHS) waiting lists and paved the way for lower interest rates.
However, business groups remain skeptical that further tax increases will support growth. The Confederation of British Industry warned in November 2024 that additional borrowing and taxes would damage business confidence, though Reeves at that time ruled out such measures for the rest of the parliamentary term.
Consumers face continued pressure from elevated inflation and slow wage growth. The small rise in unemployment is forecast to drive a further slowdown in earnings through 2025, with pay growth expected to fall back to around 3.5% by year end and 3% by mid 2026, according to the EY ITEM Club.
Consumer spending remains modest and is forecast to weigh on growth, though a small rise in household consumption is expected over the coming years as the effects of energy price increases fade and falling interest rates persuade more households to spend rather than save. Consumer spending is predicted to rise by 0.9% in 2026 and 1.4% in 2027.
The combination of weak growth, rising unemployment and looming tax increases has created a challenging backdrop for policymakers and investors alike. Financial markets will be closely watching the November 26 budget for signs of how Reeves plans to balance fiscal responsibility with the need to support economic growth and avoid tipping the country into recession.
Source: newsghana.com.gh
