Understanding the Shifting Global and UK Economic Landscape
As we step into the second half of 2025, it’s a good moment to take stock of the evolving global and domestic economic picture. From currency movements to household consumption trends, there are key developments shaping market sentiment and future prospects. Here’s a roundup of what you should know:
1. Global Sentiment Shift: Currencies and Commodities
Despite headline-grabbing concerns earlier in the year, U.S. economic momentum remains solid, driven by robust traffic in goods and services. This momentum contributed positively to Q1 GDP growth, which helped bolster global confidence.
However, under the surface, sentiment is softening:
- The U.S. Dollar is down ~7.5% year-to-date, signalling weaker international demand or investor caution.
- In contrast, Sterling is up ~8% YTD, offering some relief for the UK by making imports cheaper, important in the battle against inflation.
- Oil prices remain elevated, but their inflationary impact is partially offset by higher global yields.
For the UK, this duality of cheaper imports (via stronger GBP) and expensive energy (via oil) adds complexity to inflation management.
2. UK Growth: Strong Start, But Momentum Fading
- Q1 UK GDP grew by 0.7%, driven largely by export activity to the U.S., front-loaded public sector spending, and investment in aircraft.
- But April GDP fell by 0.3%, suggesting the initial momentum is starting to wane.
Full-year 2025 GDP is still expected to hit a respectable 1%, up slightly from 0.9% in 2024. However, the underlying drivers shift significantly:
- 2025: Growth is public-sector led, thanks to spending front-loaded ahead of the fiscal year-end.
- 2026: Public sector support will drop sharply, and private sector growth will need to fill the gap.
3. The Private Sector: Turning Point or Trouble?
The turning point for UK private sector sentiment came with the 2024 summer election, rather than the Autumn budget, though the latter added little optimism.
- Smaller businesses are more pessimistic than larger ones, facing:
- Rising input costs (particularly labour)
- Increased National Insurance and living wage burdens
- Weak investment appetite – Q1 2025 investment intentions dropped to -5%, a concerning reversal
- Despite this, the UK was recently ranked #1 for investment attractiveness, tied with India, a silver lining in an otherwise uncertain landscape.
4. Households: Caught in the Crosswinds
Despite real wage growth returning to just above pre-pandemic levels, real income growth may be overstated when you factor in rising rent, mortgages, and council tax costs not well represented in traditional CPI measures.
As a result:
- Households remain cautious; consumption is forecast to grow just 0.3–0.5% annually.
- Consumers are prioritising essentials: health, energy, education, insurance.
- Some discretionary categories are rebounding, furnishings and dining out, helped by deflation in durable goods.
Encouragingly, savings flows have normalised, and household saving rates remain high (~12%), which could support future consumption as wage gains feed through.
5. Inflation Outlook: Not Out of the Woods Yet
- Inflation is forecast to rise again, peaking at ~3.7% in September, and remain above 3% into Q2 2026.
- This keeps inflation above the Bank of England’s 2% target, meaning interest rates may not fall quickly as initially forecasted.
- Monetary policy is expected to ease gradually: 0.25% cuts per quarter until Q3 2026, with rates likely settling at ~3%, a neutral level for the economy.
6. Labour Market and Wages: Caution Ahead
The job market is showing signs of stress:
- Unemployment forecast to rise to 5% (up from ~4.6% currently).
- Firms are cutting back: redundancies and hiring freezes are increasingly common.
- Wage growth is expected to slow, especially as businesses face tighter margins.
This is particularly significant as wage expectations feed into inflation persistence. If inflation proves stickier due to higher wage settlements or policy-driven cost pressures (e.g., national living wage hikes), the BoE may be forced to hold rates higher for longer.
7. Housing Market: Weak But Resilient
- March home sales surged, but April and May saw a slowdown.
- Lending rates are improving, particularly for 2-year fixed deals, but still high relative to 5 years ago.
- First-time buyers face challenges:
- Mortgage repayments now absorb ~40% of income, up 12% in recent years.
- Raising deposits remains difficult due to elevated living costs.
Despite this, we still see a positive medium-term outlook for house prices, supported by a gradual rate decline and eventual supply-demand rebalancing.
Final Thoughts: Preparing for a Delicate Balance
The UK economy is navigating a tightrope: balancing public and private sector transitions, inflationary pressures, and global uncertainty. While some early signs of resilience are emerging, from sterling strength to investment recognition, the path forward remains nuanced.
Key risks to watch:
- Inflation persistence
- Sluggish private investment
- Weak household demand
- Labour market softening
As always, we are here to help you interpret these shifts and align your financial plans accordingly.
