The Prime Minister of the United Kingdom, Keir Starmer, came to power accompanied by pledges to take measures aimed at accelerating the growth of the country’s economic system, but as a result, the UK gross domestic product (GDP) demonstrated the opposite vector of its dynamic, however, the difficult state of affairs, which became reality instead of materializing more positive promises, seems to be beginning to demonstrate that what can be called a favorable transformation.
The mentioned statement does not mean that the situation in the United Kingdom’s economic space is approaching becoming ideal, or that it is on the verge of a fundamental absolute improvement relative to its previous condition. In this case, it implies an improvement in several indicators, but not total prosperity. Currently, there is an intensification of business activity in the United Kingdom. Local consumers are also showing increased confidence. This indicates that the economy is starting to move in the opposite direction to the downturn. Moreover, expectations are currently circulating in the United Kingdom that the Bank of England will make two more interest rate-cutting decisions by the end of 2025. This means a high probability of an overall positive outcome for the UK economic system in the current year.
At the same time, according to media reports, in the context of economic prospects, London’s main hope as a political center is that consumer activity will accelerate sharply or at least relatively sharply.
Ruth Gregory, deputy chief UK economist at Capital Economics, stated that tentative green shoots are already being observed. In this case, the official data published in the current week is implied. The mentioned positive point of view is also shared by RSM UK economist Thomas Pugh. According to the expert, there have been signs that consumers in the United Kingdom are starting to come back to life. It was also separately noted that this indicates that the UK economic system bottomed out in the second half of last year after a body blow from the budget. The expert claims that the recovery process is currently beginning.
The mentioned shift was good news for Keir Starmer and his Labour government, which declared the growth of the United Kingdom’s economy as its top priority but was faced with the pessimistic reality of maintaining GDP at the same level. In this context, it is worth mentioning that the October tax increase was extremely negatively perceived by UK businesses and consumers. Moreover, the mentioned measure, in terms of its impact on the state of affairs in the United Kingdom’s economic system, became a shock factor, which at the same time did not provoke the formation of a situation corresponding to such a concept as a deep crisis with gloomy prospects.
Labor after the elections, as noted by the media, lost a significant part of the support from the population. This is due in large degree to the state of the economy. Currently, the results of public opinion polls indicate that the mentioned political force is barely ahead of the Reform UK party.
It is worth noting that the United Kingdom’s economic system is also facing a very serious external challenge. In this case, it implies a global trade war, which is gradually becoming the new order of things in the world in its economic dimension against the background of the harsh tariff policy of the administration of the President of the United States, Donald Trump. This is a serious threat to London. In this case, the implementation of the most negative scenario is highly likely to cancel out the positive prospects for the UK economy and become more than a significant barrier to its full recovery. It is possible that, against the background of the potentially unfavorable state of affairs in the United Kingdom, Chancellor of the Exchequer Rachel Reeves will be forced to make another decision to raise taxes before the end of the current year to keep the public finances on track. Despite the threats regarding positive prospects, the internal situation is still improving.
The Office for National Statistics (ONS) on Friday, March 28, published data according to which retail sales in the United Kingdom have shown significant growth since the beginning of the current year. This means that consumers are gradually starting to spend the pot of spending they built up in 2024.
The volume of goods sold in stores and online increased by 1% in the United Kingdom in February. At the same time, economists interviewed by the media predicted that this indicator would show a decrease of 0.4%. A revised reading increased by 1.4% in January.
Sales of household goods in the United Kingdom rose by almost 7% last month. It is worth noting that the mentioned growth rate is the most intense since April 2021. Also in February, a bounceback consumer demand for jewelry, watches, and clothing was recorded in the United Kingdom.
Moreover, data released on Friday by ONS shows that disposable incomes per head rose by 1.7% in the last quarter of 2024. It is worth noting that past year in the United Kingdom there was a strong increase in wages.
At the same time, UK residents save a historically large portion of their disposable income. This means that consumers continue to take a cautious approach to spending. Despite signs of recovery, the United Kingdom’s economic system is still weak. Against this background, consumers prefer to be careful about their spending. Global turbulence is also a negative factor affecting their moods.
The saving ratio increased to 12% in the fourth quarter of last year. In the third quarter of 2024, the mentioned figure was recorded at the 10.3% mark. It is worth noting that this is the highest reading since 2010 after the financial crisis. However, in this case, it does not take into account the state of affairs that was observed during the coronavirus pandemic. Before the mentioned pandemic, the rate was less than 6%.
It is worth noting that consumer spending accounts for two-thirds of the United Kingdom’s economy. After the coronavirus pandemic, this indicator has not shown significant growth. Against the background of the relevant circumstances, the government of the United Kingdom faced an additional burden. At the same time, consumer spending is one of the main drivers of economic growth in the United States.
There is a circulating opinion among experts cited by the media that as confidence in the UK increases, consumer activity will intensify. Further lowering of the cost of borrowing is also likely to reduce the incentives to save.
The results of recent surveys suggest that, despite continued caution, households in the United Kingdom are becoming more willing to share their income. GfK found that households earning over 50,000 pounds ($64,6000) are planning to start buying big-ticket items such as fridges and furniture.
The largest retailers in the United Kingdom are also showing a favorable dynamic. In recent weeks, positive results have been published by high-street titan Next Plc, fast-fashion brand Asos Plc, and middle-class favorite John Lewis Partnership Plc.
The ONS also published information according to which the United Kingdom’s economy grew by 1.1% in 2024. At the same time, the initial forecast called for a 0.9% increase in UK GDP last year. However, GDP per head fell by 0.1% in the fourth quarter of 2024. The indicator for the whole of last year has not changed compared to the reading for 2023.
Kathleen Brooks, research director at the online trading market XTB, said that the UK consumer is alive and well. According to the expert, this indicates that the United Kingdom’s economic system may bounce back after a weak start to the year.
The data released on Friday was hailed by Rachel Reeves. It is worth noting that any upturn in the economy will be a much-needed relief for the chancellor. Rachel Reeves’ plan for the public finances was criticized this week due to its fragility.
Business activity, as measured by the composite purchasing managers’ index, reached a six-month high in the United Kingdom in March. The corresponding indicator was recorded at the 52 mark. In February, this reading was 50.5.
Employment and wages in the United Kingdom remain stable amid growing demand for staff. Next week, millions of workers will get an inflation-busting 6.7% increase in the minimum wage.
The Office for Budget Responsibility (OBR) this week halved its forecast for economic growth in the United Kingdom for 2025. The new version of this projection provides for a 1% increase in UK GDP in the current year. It is worth noting that the corresponding vision corresponds to the opinion of the private sector of the United Kingdom’s economic system on the prospects for growth. At the same time, the OBR expects UK GDP rise to pick up. It is assumed that the plans of the government of the United Kingdom for house building and rising living standards will contribute to this. It is also expected that the UK economy will show such growth, the pace of which will be faster than similar indicators demonstrated by other European countries.
Moreover, there are signs of renewed optimism in investor sentiment. The FTSE 100 shares index has outperformed both the S&P 500 and the MSCI World Index of developed markets.
At the same time, the revival in the space of the United Kingdom’s economic system does not negate gloomy prospects, which are not inevitable but are characterized by a high level of realism. Inflation is approaching 4% again. This is happening against the backdrop of rising energy and food prices. There is also a high probability that unemployment in the United Kingdom will pick up. The corresponding risk is associated with the fact that next month 26 billion pounds of payroll tax unveiled in October takes effect.
The state of affairs in the United Kingdom’s economic system is currently better than last year’s expectations, but its path forward will not be easy. Internal and external factors form a cumulative serious challenge.
As we have reported earlier, UK Escapes Recession Threat.
