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P.ublished 12th February 2026
business
Growth Disappointment Highlights The UK’s Economic Fragility
Image by Lalmch from Pixabay
GDP disappointed at year-end in 2025, growing by 0.1% in Q4, below the Bank of England’s and others’ expectations for growth of 0.2%. Elsewhere, revisions reveal that the economy was effectively flat between June and December 2025, bringing final growth for the year to 1.3% from the expected 1.4%. This demonstrates the significant damage that last year’s high levels of policy uncertainty inflicted upon activity. Weakness in construction output in particular reflects the impact of speculation over housing taxation, rising costs and regulatory disfunction, pushing activity to its lowest level since September 2024. The dominant services sector also stalled, posting no growth in Q4.
Overall, the latest data paint a fragile picture of economic conditions, with demand and momentum fading as uncertainty intensified towards year-end. But encouragingly, our January confidence data shows a welcome rebound in sentiment among business leaders — the sharpest increase since immediately after the General Election — alongside improving revenue expectations. But just as a decent headline rate of GDP in 2025 growth masks underlying weakness, so is the case with this year’s recovery in business confidence.
Businesses continue to feel the strain from an extremely sharp rise in the tax burden, with further cost rises to come this year, but there are welcome signs that decisions are coming off pause and activity is lifting. And there are some areas of policy focus in government this year which could reinforce growth further. Business rates reform, trade ties with the EU, industrial strategy and infrastructure investment are all major opportunities to improve the environment for growth and living standards in the UK. A faster pace of implementation could build on recovering momentum in the private sector and drive a brighter growth outlook this year.
“A softer-than-expected end to last year comes as little surprise given the pressures many businesses experienced throughout the year: uneven demand, rising costs and persistent uncertainty that led key hiring and investment decisions to be deferred.
“Growth last year leant heavily on public spending; the challenge now is to get private sector demand firing too. That depends both on households feeling able to spend more freely and on determined action to remove blockers to investment.
“Stability remains vitally important if we’re to build momentum across the economy and is a key part of the UK’s pitch to investors at home and abroad. However, stability alone will not give firms the confidence required to press go on critical investments that deliver growth, jobs and opportunity across all parts of the country.
“The Spring Forecast should be a critical delivery moment for the government's growth mission. Businesses want to see government take action to speed up relief for high industrial energy costs, collaborate with firms to find appropriate landing zones for the Employment Rights Act, and make real progress on tax simplification to ease the cost of doing business.”
The UK economy managed to carve out another quarter of modest growth at the end of 2025, and annual growth of 1.3% shows it has proved stubbornly resilient.
Elevated interest rates, sticky inflation, and months of budget-related uncertainty could have been enough to stall activity altogether. Instead, growth has held up, albeit only just.
There are early signs that once the fog around the Autumn Budget began to clear, parts of the economy regained direction, particularly across the services sector. That was enough to offset ongoing weakness in manufacturing and construction and keep the economy inching forward.
For savers, if the Bank of England base rate heads lower as anticipated this year, today’s cash interest rates will fall. Relying too heavily on cash risks seeing returns eroded as inflation persists. For those with a longer-term horizon, this is a reminder that investing remains one of the most effective ways to try to protect and grow purchasing power over time, even
“Today’s data shows the first annual estimate of GDP came in at 1.3% in 2025, just below our own forecast of 1.4%. But quarterly growth was weaker than expected, at just 0.1% in Q4.
“Beneath the headline, the quarterly data paints a subdued picture. Services were flat, construction fell sharply, and business investment dropped in the quarter. That combination points to weak momentum going into 2026 and underlines the persistent low growth trap the UK faces.
“The past twelve months have been marked by uncertainty and rising costs for firms across the country. Our latest survey of UK firms in Q4 shows that most SMEs are holding back on investment, with rising taxation and cost pressures are cited as the top two concerns.
“Improving the outlook now depends on restoring business dynamism. Government must move from strategy to delivery – backing infrastructure projects, speeding up planning decisions, addressing skills gaps, and strengthening export support – so firms can invest, export and grow.”
Whatever the government's growth strategy may be, it isn't working. The economy has virtually stalled since the spring. And GDP per head is falling again: if you feel poorer, it's because you are.
This is an utter failure for a government that is so vocal about prioritising growth. They need to act quickly to turn this around. That means at the very least to stop sliding in the wrong direction with growth-damaging measures like business tax rises and the Employment Rights Act. The tax and spending burden needs to fall, and massive deregulation and supply-side reform is required to unlock our economy and get Britain growing again.