Pound Falls as OBR Downgrades UK Economic Growth Forecast to 1% in 2025
Introduction
The British pound (GBP) fell sharply against major currencies after the Office for Budget Responsibility (OBR) downgraded its UK economic growth forecast for 2025. Chancellor Rachel Reeves delivered the spring statement on March 26, 2025, acknowledging the economic challenges while defending the government’s long-term growth strategy.
This article explores:
✔ Why the pound declined after the OBR’s revised forecast.
✔ Key highlights from Rachel Reeves’ spring statement.
✔ Market reactions, including FTSE 100 movements.
✔ Expert analysis on inflation, productivity, and fiscal policy.
Key Takeaways:
- Pound Sterling (GBP) drops against the dollar and euro after OBR slashes UK growth forecast.
- OBR revises 2025 GDP growth to 1%, down from 2% in October 2024.
- Chancellor Rachel Reeves defends government’s long-term economic plan in spring statement.
- Inflation forecast rises to 3.2% in 2025, up from previous 2.6% estimate.
- FTSE 100 gains as weaker pound boosts export-heavy index.
OBR Cuts UK Growth Forecast – Pound Reacts
1. GDP Growth Downgraded to 1% in 2025
The OBR’s latest report revised UK GDP growth for 2025 to just 1%, down from 2% in its October 2024 forecast. The downgrade reflects:
- Weaker-than-expected consumer spending.
- Global economic uncertainty.
- Persistent inflation pressures.
Despite the 2025 downgrade, the OBR upgraded growth projections for 2026-2029:
| Year | Previous Forecast | New Forecast |
|---|---|---|
| 2025 | 2.0% | 1.0% |
| 2026 | 1.8% | 1.9% |
| 2027 | 1.9% | 2.0% |
2. Inflation Forecast Rises to 3.2%
The OBR now expects UK inflation to average 3.2% in 2025, up from its previous 2.6% estimate. This suggests:
- Higher interest rates may persist longer.
- Consumer purchasing power remains under pressure.
Rachel Reeves’ Spring Statement: Key Points
Chancellor Rachel Reeves addressed the OBR’s revised forecasts, acknowledging the economic headwinds while outlining the government’s strategy for long-term growth.
1. Planning Reforms to Boost GDP
Reeves emphasized that planning reforms would:
✔ Increase GDP by 0.2% by 2029/30 (£6.8bn boost).
✔ Expand GDP by 0.4% in 10 years (£15.1bn boost).
"This is the biggest positive growth impact the OBR has ever attributed to a policy with no fiscal cost," Reeves stated.
2. Infrastructure & Investment Plans
The government’s growth strategy includes:
-
Expanding Heathrow Airport’s third runway.
- Reforming pension systems to increase investment.
- Launching a National Wealth Fund.
- Reducing regulatory barriers.
"There are no shortcuts to economic growth," Reeves said. "It will take long-term decisions and hard work."
Market Reaction: Pound Falls, FTSE 100 Rises
1. Sterling Weakens Against Dollar & Euro
- GBP/USD fell 0.4% to $1.2892.
- GBP/EUR dropped 0.3% to €1.1950.
A weaker pound typically benefits UK exporters, as their goods become cheaper for foreign buyers.
2. FTSE 100 Gains on Export Boost
The FTSE 100 (^FTSE) rose 0.5% to 8,707 points, driven by:
✔ Stronger export earnings (due to weaker GBP).
✔ Energy and mining stocks leading gains.
Expert Analysis: What’s Next for the UK Economy?
1. Deutsche Bank’s Warning on Public Finances
Sanjay Raja, Chief UK Economist at Deutsche Bank, noted:
- Public finances are worse than expected.
- Fiscal headroom remains "historically low."
- OBR’s productivity assumptions may be "too optimistic."
2. Long-Term Growth Challenges
The UK faces:
???? Low productivity growth.
???? High inflation persistence.
???? Global economic uncertainty.
Conclusion: What Does This Mean for the UK?
The OBR’s downgrade signals economic struggles ahead, but Rachel Reeves remains committed to structural reforms. Key takeaways:
✅ Short-term growth slowdown expected in 2025 (1% GDP).
✅ Long-term recovery projected from 2026 onwards.
✅ Pound weakness benefits FTSE 100 exporters.
✅ Inflation remains a concern at 3.2%.
Investors and businesses should monitor fiscal policies, inflation trends, and global economic shifts in the coming months.