Recession fears grow as UK economy faces threat of 'stagflation' in 2025

In addition, just 53 per cent expect inflation to drop below the Bank of England's target rate of two per cent.

The data from Ipsos shows a gloomy outlook for the upcoming year as the UK economy faces serious challenges.

The latest GDP figures show the economy shrank in both September and October 2024. If December's economic activity doesn't improve, economists will be closely watching the first three months of 2025 to see if the UK officially enters a recession.

The pound has dropped to its lowest point against the dollar in seven months, adding to the concerns, with the economy showing signs of stagnation since summer 2024, with zero growth recorded in the third quarter.

The Bank of England also forecasts no expansion in the final quarter of the year, leaving the economy close to a technical recession (two consecutive quarters of negative economic growth.)

This is a sharp contrast to early 2024, when the economy had seen a healthy rebound with growth of 0.7 per cent in the first quarter. The lack of growth in the last couple of months has led to analysts suggested the Government may have to introduce an emergency budget in the spring of 2025, possibly raising taxes to deal with the situation.

The Government's current economic plans, which depend heavily on growth, could be at risk if growth continues to disappoint. Labour's budget from October 30 has raised concerns, particularly due to plans for sharp increases in national insurance contributions for employers and higher minimum wage levels next year.

Many businesses have already warned they will need to raise prices in response to these policy changes. These price increases could push inflation above three per cent by spring 2025, according to market observers.

The policy changes are also expected to impact employment, with companies likely to pull back on hiring. These developments have raised fears about the economy facing a combination of stagnating growth and rising inflation pressures.

Chris Williamson of S&P Market Intelligence said: "Companies are giving a clear thumbs down to the policies announced in the Budget, especially the planned increase in employers National Insurance contributions."

While the OECD still expects the UK to grow by 1.7 per cent in 2025, economists are becoming more concerned about the country's stagnating economy.

Laith Khalaf, head of investment analysis at AJ Bell, warned that “with the economy stalling, the watchword for 2025 is now stagflation”.

He said: "Wherever you look, the green shoots of an inflation revival seem to be pushing up the turf. As inflationary forces gather, the Bank of England isn’t going to be gung-ho about cutting interest rates.”

The Bank has already shown caution in its approach to rate cuts, having reduced rates only twice in 2024 - to five per cent in August and 4.75 per cent in November.

The central bank has emphasised it will take only a "gradual approach" to future rate reductions.

The broader economic outlook for 2025 appears equally concerning, with British sentiment lagging behind global averages.

Only 41 per cent of Britons believe the global economy will be stronger in 2025 compared to 2024, according to the Ipsos survey.

This figure sits ten percentage points below the global average of 51 per cent, highlighting particularly strong pessimism among UK residents.

The downbeat outlook follows a bumpy 2024, which saw inflation briefly fall to target before rising again to 2.6 per cent by November.

Despite two interest rate cuts during the year, persistent inflation concerns and weakening economic indicators have dampened hopes for a strong recovery in 2025.