Sharp payroll job losses in March coupled with all-time low consumer confidence pose significant risks to the United Kingdom’s economy. Consumption comprises almost two-thirds of the UK’s GDP and despite first quarter retail sales coming in strong, households are concerned about their employment opportunities, higher charges for utilities, energy, government fees and duties starting this month and a possible uptick in future prices due to rising trade tensions. Moreover, reductions to welfare and social benefits designed to boost productivity and alleviate a challenging fiscal situation are weighing on sentiment. So, are recent tax increases that were enacted against the backdrop of elevated budget deficits and a sizeable amount of sovereign debt? And while the Bank of England can help stimulate growth by reducing short-term rates, the heaviest long-term borrowing costs in decades will reduce the alleviation that monetary policy easing efforts typically provide.
Economic Outlook
Coming into the year, I anticipated that the UK’s economy could grow 1.3% after expanding 1.1% and 0.4% in 2023 and 2024. Today, however, I believe the country’s challenging fiscal conditions and the negative impacts of the trade war will bring GDP growth of only 0.7%. The US is an important UK trading partner, second only to the European Union, so the Trump administration tariffs will be a hurdle for the country’s manufacturing sector and overall economy. However, the UK is on the White House’s list of close allies and will likely not be subject to severe measures or heightened confrontation.
PMIs Depict a Slipping UK
April has been a struggle for the UK, with the country’s PMI Composite Index falling from 51.5 in the preceding month to 48.2. Not only did the result drop below the contraction-expansion level of 50, it was also the lowest score in 29 months. The Services PMI Business Activity Index sank from 52.5 to 48.9, a 27-month low, while the Manufacturing PMI fell from 45.3 to 44, the weakest print in 20 months. Both manufacturing and services sectors reported declines in demand from international markets, reduced sentiment for the year ahead, and aggressive job cuts. The report marks a sharp reduction in first quarter economic gains following robust retail sales numbers in January, February and March.
These are significant developments from a global standpoint when considering that the UK is highly regarded as a provider of financial, legal and business services. Additionally, its manufacturing sector has a strong position in producing high-value aeronautical, pharmaceutical and automotive products.
But Retail Sales Signalled a Strong March
On a positive note, March was another strong month for household spending with retail volumes climbing 0.4% month over month (m/m), exceeding the analyst expectation for a 0.4% decline but easing from February’s 0.7% increase. Activity climbed 2.6% relative to the same month in 2024, exceeding the median forecast projecting an unchanged 1.8%.
Future Consumption Faces Uphill Battle Though
Consumption faces a two-pronged challenge—record low consumer sentiment and a recent pickup in layoffs. On Thursday, the British Retail Consortium (BRC) reported that households’ views of the economy over the next three months fell from -35 in March to -48 this month, its lowest level on record. The organisation attributes the sharp decline to fears about the trade war increasing prices. The job market, furthermore, appears to be weakening with preliminary estimates depicting that payrolled workers decreased by 78,000 m/m in March, a sharp drop from the modest 8,000 decline in February. As noted previously, businesses anticipate making additional cuts, according to this month’s PMI report.
A Path to Acceleration Still Exists
Even with dour consumer sentiment and a softening job market, UK growth could surprise to the upside. Consumers, for example, could maintain or increase spending despite tariff induced price increases because their finances appear sound. The average UK household savings ratio has grown from 3% during the second quarter of 2022 to 12% as of the final quarter of 2024, according to the Office for National Statistics.
In another development, real regular pay, based on the CPIH, which includes housing costs, grew at an annualised rate of 2.1% during the three-month period ended in February. The high savings rate and increase in purchasing power may result in consumers being less susceptible to price pressures. Furthermore, an unemployment rate of 4.4% still depicts tight labour conditions despite the recent losses of payrolled workers.
The UK’s decision to scale back social programs, while potentially weighing on consumer sentiment, may also provide significant benefits because it could incentivise more individuals to obtain employment, boosting the nation’s productivity and growth profile as a result.
Finally, the Trump administration’s tariff campaign is fluid. While reports regarding progress on UK-US negotiations have painted mixed results, the White House has recently tempered its statements on cross-border levies. To that end, the two nations could conceivably reach a deal that could avoid, or at least limit, the pain of protectionism.
Author: José Torres, Senior Economist at Interactive Brokers LLC
