Bank of America lifts UK 2025 growth outlook to 1.3% as inflation risks loom

BofA Securities has raised its 2025 UK economic growth forecast slightly to 1.3% from 1.2% due to stronger-than-expected Q2 results, though it cautions that underlying momentum remains fragile, hampered by contracting private demand, tariffs, and taxes. The brokerage also revised its 2025 and 2026 inflation forecasts higher to 3.4% and 2.4% respectively, while maintaining expectations for two interest rate cuts by early 2026, despite increased uncertainty regarding their timing. BofA further flagged significant downside risks to growth in late 2025 and 2026 from potential tax increases, as an estimated £20-30 billion reduction in fiscal headroom is anticipated in the upcoming Autumn Budget, underscoring a cautious long-term outlook.

Analysis

Bank of America has modestly upgraded its 2025 UK economic growth forecast to 1.3% from 1.2%, predicated on stronger-than-expected second-quarter results. However, this headline revision masks significant underlying fragility, as the report indicates that Q2 growth was driven by government spending and inventories, while private domestic demand contracted. Key indicators of economic health, such as consumer spending and business investment, were weak, and exports are under pressure, evidenced by a 27% decline in the value of goods shipped to the US due to tariffs. The outlook is further complicated by persistent inflation, with BofA raising its forecasts to 3.4% for 2025 and 2.4% for 2026, pushing the return to the Bank of England's 2% target out to 2027. While BofA still pencils in two interest rate cuts by early 2026, it stresses that the timing is highly uncertain. A significant downside risk looms from fiscal policy, with an estimated £20-£30 billion reduction in fiscal headroom in the upcoming Autumn Budget potentially forcing tax increases that would suppress growth in late 2025 and 2026.

Key Decisions for Investors

• Investors should treat the minor 2025 growth forecast upgrade with caution, as contracting private demand and falling business investment suggest a fragile underlying economy, warranting a defensive posture on UK domestic-focused equities.
• Monitor upcoming UK inflation prints and Bank of England guidance closely, as any delay to the two anticipated rate cuts due to inflation persistence would directly impact gilt yields and valuations for rate-sensitive sectors.
• The Autumn Budget on November 26 is a key risk catalyst; potential tax increases to address the forecasted £20-£30 billion fiscal shortfall could significantly dampen growth prospects for late 2025 and 2026, requiring a reassessment of UK asset allocations.