United Kingdom: On the brink of a recession?
7 JAN, 2025
Author: Steven Bell, Chief Economist for EMEA, Columbia Threadneedle Investments
Optimism about the UK's economic prospects has been negatively affected in recent months. Business and consumer confidence surveys have reversed their upward trends, while GDP, which had shown dynamism in the first half of the year, has slowed in the last quarter. According to the most recent hiring survey, employment suffered a significant weakening in November. Although bad weather and a 10% increase in domestic energy bills in October have contributed to this situation, the Budget and other decisions of the new Labour Government have played a crucial role.
United Kingdom: Outlook for 2025
Next, we analyze the outlook for 2025 and try to assess the severity of the problems facing the UK.
Let's start with the latest Budget. By ruling out increasing revenues from the main sources of taxes, Chancellor Rachel Reeves chose to raise the astronomical figure of 25,000 million pounds through employer contributions to social security. Taxes will also be increased in other areas. Public spending will grow over the next two years. Added to a 6.7% increase in the minimum wage (17% for some young workers) and plans to expand labor rights, the new government has imposed a significant burden on labor-intensive sectors.
Although some analysts have suggested that the Budget has a stimulating character, as the boost in public spending could offset the drag of higher taxes, even they consider that this effect will be temporary. Many other analysts are more pessimistic in their assessments.
The prospects are undoubtedly worrying. It is almost certain that unemployment will increase as companies reduce hiring and many firms with low margins disappear. However, before falling into pessimism, it is important to highlight some positive aspects.
- First, although inflation is on the rise, it remains relatively low and is below wage growth. This will allow a slight increase in real income in 2025.
- Second, consumers are already allocating a significant portion of their income to savings, which puts them in a favorable position to increase their spending.
- Third, the real estate market is showing signs of recovery, and interest rates, which determine mortgage rates, have reversed much of the increases prior to the Budget.
Although the Budget will likely raise inflation, it is likely that the Bank of England will continue with interest rate cuts. The governor has suggested that we could see a cut of up to 1% in 2025. Lastly, the chancellor has maintained the generous investment exemptions introduced by the previous government and has committed to not raising the corporate tax for the rest of the legislature.
Conclusion
In conclusion, we believe that the United Kingdom will avoid recession in 2025, although growth will be markedly slow and will be accompanied by a notable increase in unemployment. There is no doubt that the Treasury is puzzled by the reaction to the Budget, and it is rumored that it is considering "rescheduling" some of the most significant increases in planned public spending.
The Budget has done little to achieve the goal of ensuring a lasting improvement in the growth of the United Kingdom. To achieve this, it will be essential to implement reforms. The main priority should be to control the skyrocketing spending on health benefits and disability, which is expected to reach 100 billion pounds in 2028, equivalent to almost 4,000 pounds for each household in the United Kingdom. If they manage to address this challenge, they could improve public finances, increase the labor supply, and stimulate economic growth. Let's hope they succeed.
