October 2025, the UK economy shrank slightly, while the US economy was expanding strongly and the EU economy was growing modestly

12th December 2025

In October 2025, the UK economy shrank slightly, while the US economy was expanding strongly and the EU economy was growing modestly. This contrast highlights how the UK's stagnation is more domestic in nature, whereas the US and EU are benefiting from stronger consumer spending and investment.

United Kingdom (ONS data, Oct 2025)
GDP: Fell 0.1%, second consecutive monthly decline.

Trend: Flat or negative growth since June.

Sectors: Services stagnant, manufacturing weak (car production hit by cyberattack), construction contracting.

Implication: UK risks slipping into recession if weakness continues.

United States
GDP growth outlook: Expected to finish 2025 with ~3% growth, supported by strong consumer spending and holiday demand.

Quarterly data: Q2 2025 saw +3.8% growth, rebounding from a small contraction in Q1.

Drivers:

Robust consumer spending (especially in Q3, growing at 3% annualized).

Investment in AI and high-tech sectors.

Implication: US growth is resilient, with households still spending despite inflation pressures.

🇪🇺 European Union / Euro Area
GDP (Q3 2025): Grew 0.3% in the euro area and 0.4% in the EU compared to the previous quarter.

Annual growth: +1.4% in the euro area, +1.6% in the EU.

Regional variation: Stronger growth in countries like Sweden (+1.1%) and Portugal (+0.8%), but contractions in Lithuania, Ireland, and Finland.

Implication: Growth is modest and uneven, with trade tensions and high debt levels weighing on the outlook.

What This Means in Context
UK vs US: The US is powering ahead with strong consumer demand, while the UK is stagnating. This divergence suggests UK-specific challenges (manufacturing disruptions, weak services, construction slowdown) rather than a global downturn.

UK vs EU: The EU is growing modestly, showing resilience despite trade and debt concerns. The UK's contraction stands out as weaker compared to its European peers.

Global picture:

US: Strong growth, consumer-driven.

EU: Modest growth, fragile but positive.

UK: Stagnation, recession risk.

Risks & Trade-offs
UK households: Facing tighter budgets, slower wage growth, and fewer job opportunities.

Government policy: Pressure to stimulate growth, but fiscal constraints limit options.

Global competitiveness: If stagnation persists, the UK risks falling behind both the US (innovation-driven growth) and EU (steady, if modest, expansion).

In summary: While the US is ending 2025 on a strong footing and the EU is managing modest growth, the UK economy is uniquely struggling with stagnation. This raises the risk of recession and highlights the need for targeted policies to revive investment, productivity, and consumer confidence.

Policy responses for the UK's stagnation risk
The UK faces weak private demand and soft momentum through 2025; policy responses need to balance near‑term support with long‑term productivity. Below are the most relevant levers, how they work, and what they mean for households and businesses.

Monetary policy options by the Bank of England
Rate cuts: Lowering Bank Rate would reduce borrowing costs for mortgages and business loans, easing cashflow and potentially lifting consumption and investment. The Bank will weigh inflation persistence and financial‑stability risks before moving, especially given elevated energy and labour costs and uneven demand signals.

Forward guidance: Clear communication about the path of rates can stabilise expectations and lower market volatility, helping firms plan hiring and capex.

Macroprudential tweaks: Adjusting countercyclical capital buffers or targeted measures can keep credit flowing while safeguarding resilience if growth weakens further.

Fiscal policy choices from the Autumn Budget and beyond
Targeted relief: Time‑limited support for low‑to‑middle income households (e.g., benefit reforms, energy bill support) sustains consumption without large structural deficits; the removal of the two‑child limit in universal credit reflects a tilt toward social support alongside tighter tax policy.

Tax calibration: Raising revenue while protecting investment is the trade‑off; current decisions increase the tax take and fiscal headroom by late decade, but heavy front‑loading can dampen private demand if growth is already weak.

Automatic stabilisers: Allowing stabilisers to operate (benefits and lower tax receipts in downturns) cushions shocks without ad‑hoc measures, while preserving credibility if medium‑term rules remain intact.

Investment, productivity, and supply‑side measures
Public investment boost: Near‑term infrastructure outlays (transport, energy grids, digital) can lift demand now and productivity later; however, future fiscal tightening could cap the impulse if not sequenced well.

Business investment incentives: Full expensing or enhanced allowances for machinery, R&D, and digital adoption crowd in private capital, addressing chronic productivity weakness and helping manufacturing recover from recent disruptions.

Skills and labour market: Vocational training, reskilling for AI/digital, and targeted migration policy alleviate labour bottlenecks and raise participation, supporting services and construction without stoking wage‑price spirals.

Industrial and trade strategy
Sectoral recovery plans: Automotive, advanced manufacturing, and clean energy need stable policy frameworks, supply‑chain risk management, and export support to regain momentum after shocks and cybersecurity incidents.

Trade facilitation: Reducing frictions, improving customs efficiency, and pursuing targeted agreements can lower costs for manufacturers and services, supporting competitiveness in a slow‑growth environment.

What this means for households and businesses
Households: Relief targeted at lower‑income families and potential rate cuts would ease budgets; the net effect depends on inflation trends and employment stability as demand remains fragile.

Businesses: Clear rate guidance, predictable tax rules, and investment incentives reduce uncertainty, supporting hiring and capex; without productivity gains, private demand will stay soft even if headline GDP stabilises.

A credible mix is modest, data‑dependent rate cuts, targeted household support, and a front‑loaded productivity agenda (investment, skills, and sectoral recovery). That combination addresses immediate weakness without sacrificing long‑term resilience