Morgan Stanley also expects sub-1% UK GDP growth this year

(Reuters) - Morgan Stanley, on Monday, forecast UK's economic growth would be less than 1% this year, echoing the estimate of its Wall Street peers Goldman Sachs and J.P.Morgan, citing a slowdown in Britain's economy and signs of labour market weakness.

The brokerage now expects the UK's gross domestic product growth to be 0.9% in 2025, compared to its prior forecast of 1.3%.

However, the Bank of England (BoE) has predicted growth of 1.5%, partly reflecting a short-term boost from a temporary increase in public spending announced by Finance Minister Rachel Reeves in October.

Britain's economy flat-lined in the July-September quarter of last year and the central bank estimates zero growth in the last three months as well, as the uncertainty ahead of the budget showed up in businesses in November.

Further, a recent survey highlighted tepid growth across businesses edged up at the start of 2025 but employment and optimism contracted again and price pressures rose, underscoring the central bank's challenge.

The BoE started raising rates in December 2021, earlier than other major central banks, and kept its main rate unchanged at a 16-year high of 5.25% until last July.

Since then it has lowered rates twice -- less than its peers -- and has stressed it is likely to move gradually on further cuts due to persistent inflation pressures.

"While the peak impact of the BoE's policy tightening is likely behind us, its drag on the economy still persists," Morgan Stanley strategists led by Marina Zavolock said in a note.

Morgan Stanley still expects five BoE rate cuts this year -- in February, May, June, August and November -- resulting in the policy rate falling to 3.5% at the end of 2025 from 4.75% currently.

Traders are pricing in between two and three quarter-point rate cuts by the BoE in 2025, with a roughly 85% chance of a cut to 4.5% on Feb. 6.

(Reporting by Kanchana Chakravarty and Siddarth S in Bengaluru; Editing by Mrigank Dhaniwala and Savio D'Souza)