The Organisation for Economic Co-operation and Development (OECD) has forecasted that the UK's gross domestic product (GDP) will increase by only 1% in 2025, placing it below other G7 nations such as Canada, France, Germany, Italy, Japan, and the US.
The UK economy is described as "sluggish" by the OECD, primarily due to the residual impacts of multiple interest rate hikes. It predicts a modest 0.4% growth for this year, a reduction from a previous estimate of 0.7%. This year, only Germany will have slower economic growth than the UK, placing the UK's expansion rate as the second slowest among the G7 nations.
The OECD attributes ongoing high inflation and the uncertainty surrounding future interest rate adjustments by the Bank of England (BoE) as factors dissuading investment. Despite recent National Insurance cuts totalling a 4% reduction, the OECD notes that frozen personal income tax thresholds continue to impose a fiscal drag, where individuals may end up in higher tax brackets as their earnings increase.
Furthermore, a governmental policy enabling full tax deductions for business investments in machinery and equipment is seen as insufficient to offset the rise in corporation tax from 19% to 25%.
The OECD, however, suggests that long-term measures, including the free childcare scheme, could alleviate fiscal pressures. With inflation easing from last year's 40-year peak to 3.2% in April, and interest rates steady at 5.25% since last September, the OECD anticipates a reduction in borrowing costs beginning this autumn, potentially reaching 3.75% by the end of next year.
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