There is a lot going on, as I hardly need to say, but there is always time to reflect. And today’s reflection is about how the UK economy did last year and, more importantly, whether economic forecasters read it right.
This is a response to demand. I asked if the annual forecasting league table should be brought back after a one-year absence, and the answer was overwhelmingly yes.
Before I hand out the plaudits, I should look briefly at the economy last year, and how forecasters fared in predicting it. Thinking back, there was a lot of gloom at the start of 2025, reflecting the fading of growth in the second half of 2024 and the very negative response to Rachel Reeves’s first budget.
But then the economy got off to a surprisingly good start, gross domestic product (GDP) rising by an inflation-adjusted 0.7 per cent in the first quarter, leading to a flurry of upward revisions of growth forecasts in the spring — ironically, just weeks after the Office for Budget Responsibility (OBR) had downgraded its forecast by a little too much.
We still await final data for the fourth quarter, but it looks as if the UK economy grew by 1.4 per cent last year, a bit better than the 1.1 per cent consensus a year ago.
Most forecasters were in the right ballpark when it came to growth, on average only slightly low. But most were much too low on inflation, which proved more stubborn than they expected. A few days ago, we had the December consumer prices inflation figure, which was 3.4 per cent, up from 3.2 per cent in November. This meant a fourth-quarter inflation average that was also 3.4 per cent — quite a bit above the 2.7 per cent expected, on average, by forecasters.
There was also a miss on unemployment, with the rate rising to 5.1 per cent — equivalent to an unemployment level of 1.84 million — when a 4.5 per cent rate was the general expectation.
• Unemployment holds near five-year high as wage growth slows
There were several moving parts in the job market story in 2025. One was that payroll jobs, based on data from HM Revenue & Customs, fell by 184,000 over the course of the year, with some of that due to the impact of the budget increase in employer national insurance (NI), which took effect in April, on sectors such as retail and hospitality.
The fog has not yet lifted from the labour market, however. The unemployment figures are based on labour force survey data, which pointed to a rise in employment of more than 300,000 compared with the start of last year. Unemployment rose because the workforce grew faster than employment, and because of a sharp fall in the rate of economic inactivity — people unavailable for work. The inactivity rate fell from 21.6 to 20.8 per cent, with some people making themselves available for work even if jobs did not yet exist for them.
It is a complex picture, and anybody who got close to what happened to the unemployment rate deserves congratulation. Nobody, on the other hand, got close to the important number for public sector net borrowing, which proved even more stubborn than inflation.
It ended up at £152.6 billion for the 2024-25 fiscal year, more than £20 billion above the highest forecast made in January last year. And, because this is a fiscal year figure, we were already some two thirds of the way through it at the time when most of these forecasts were made.
I think I know what happened. The figures from April to November 2024, which most would have had when doing their forecasts, were not bad, with cumulative borrowing of £113 billion. But then came a big December figure, which threw things off course, and the next few months were not as good as hoped.
• UK borrowing rises to second-highest level ever
If forecasters got it wrong on the big fiscal number, most were on the right track on interest rates. A quarter-point cut each quarter last year was a good position to have, and we had four Bank rate reductions to 3.75 per cent, which was what many expected.
Now for the plaudits. Pantheon Macroeconomics tops the forecasting table and Robert Wood, who took over as chief UK economist at the firm in 2024, is to be heartily congratulated. He is an experienced economist whose background includes long periods at Bank of America and the Bank of England, two very different organisations. For this year, he is quite cautious about growth, which he thinks will be only 1 per cent, and inflation, which he sees ending the year at an above-target 2.7 per cent. This, he believes, will leave room for only one cut in interest rates, to 3.5 per cent.
Running him close were Oxford Economics and the Institute of Chartered Accountants in England and Wales (ICAEW). Frustratingly for them, they missed out on what could have been a winning point by not submitting a forecast for the budget deficit — unless it got lost in the post.
Quite a lot of forecasters have fallen by the wayside since I last did this exercise, age and retirement playing their part. Some, like Goldman Sachs, which won two years ago, are still forecasting but have left the Treasury’s compilation.
I should say something about the OBR, the official forecaster, and the Bank of England, whose forecasts regularly command the headlines. The OBR, you will note, comes very near the foot of the league table, but it operates at an important disadvantage: its two forecasts a year are typically published in the autumn and spring.
The OBR forecast in this comparison was published alongside the budget at the end of October 2024, but in practice was finalised some weeks before that. Between then and January, it became clear that the UK economy was losing momentum and that the budget had added to inflationary pressures. By March 2025, the OBR had halved its growth forecast.
It will take comfort from the fact that its public borrowing forecast, while some way off the out-turn, was closer than most.
The Bank has never featured in the Treasury’s monthly compilation of independent forecasts, though I am not sure why. Its latest forecast at the start of last year was the one published in November 2024. Had it been included, it would have been very close on growth and interest rates, but low on inflation (2.7 per cent) and the unemployment rate (4.1 per cent).
So, a mixed year for the economy, and for forecasters. We can hope for better this year.
PS
There isn’t room to develop the point this week, but a reader has sent an example of what may be the biggest marginal rate in our tax system — one that puts the 62 per cent combined income tax and national insurance rate, which kicks in at £100,000, to shame. More next week, and more examples of crazy tax rates you have come across, please.
david.smith@sunday-times.co.uk