The UK could be the third fastest-growing economy in the G7 this year, with improvements in living standards for lower-income households and inflation easing over the course of 2025.
UK GDP is projected to increase by 1.5% this year, according to the latest quarterly forecast from the National Institute of Economic and Social Research, which predicts that there will only be one more interest rate cut from the Bank of England by December.
"Growth will be driven mainly by the fiscal expansion announced in the October Budget, which will start having a tangible effect during the course of 2025, coupled with continued growth in business investment," NIESR said.
Professor Stephen Millard, director of the independent research institute, said: "Although consumer and business confidence fell at the back end of last year leading to a flattening of GDP, we expect 2025 to be better as the large increase in government spending announced in the October budget kicks in."
However, the boost from government spending will "only be a temporary boost", with increases in private and public investment and planning reforms "much more important for long-run growth".
Overall real personal disposable income is projected to grow 1.9% in 2025 and 1% in 2026, with lowest-income working households better off thanks to the increases in the minimum wages.
But because of falls in living standards between 2022 and 2024, the forecast increase in GDP this year will only see the bottom 40% of households by income return to pre-2022 levels before the end of 2027.
UK inflation is forecast to end the year at 2.4%, after a rise to 3.2% in January and a slow fall back towards the Bank of England's 2% target, leading NIESR to predict just one further interest rate cut this year.
"The Government looks likely to be on track to meet its new fiscal rules, but it will have no headroom by the end of the parliament to absorb any shocks or boost public investment. Even a modest increase in borrowing costs could push the projected balanced budget into deficit by the end of the parliament– thereby breaking the ‘stability rule’."
To avoid that, NIESR recommended the government consider changing its commitment around taxation to provide a buffer that can absorb cyclical economic shocks.