Retail figures released this week have offered a welcome reprieve to policymakers and businesses alike, suggesting that Britain’s economy may be gathering positive momentum after a sluggish start to 2025. April retail sales volumes jumped by 1.2% month-on-month—far exceeding most forecasts—and this marked the fourth consecutive monthly increase in sales, the longest such run since early 2020. The Office for National Statistics also reported that consumer confidence edged higher in May, bolstered by easing fears over unemployment and a slight dip in inflation expectations. Taken together with the Bank of England’s decision in February to cut interest rates for the first time since mid-2023, these data points imply that household spending could support GDP growth through the second quarter.
Yet despite these upbeat signals, challenges remain. Inflation, though moderating from its 2024 peaks, still stands above the central bank’s 2% target, driven in part by lingering pressures on energy and food prices. Wage growth has begun to outpace headline inflation, but real incomes remain under strain given elevated borrowing costs and higher taxes introduced in the October 2024 budget. Meanwhile, fiscal headwinds—including a government borrowing target that remains ambitious and looming departmental spending constraints—continue to put a ceiling on public-sector contributions to growth. On the external front, global uncertainty—ranging from U.S. tariff threats to China’s slowing demand—poses further downside risks. As a result, many economists caution that while the recent data offer genuine reasons for optimism, Britain is not yet out of the woods.
Stronger Retail Sales Offer a Glimmer of Hope
Retail sales volumes in April rose by 1.2% from March, according to the ONS, outpacing the consensus forecast of a 0.2% increase. This uplift was mainly driven by spending at food stores and household goods outlets, as well as a rebound in non-food categories such as department stores. Clothing retailers also saw year-on-year growth, reversing a lull earlier in the year. Analysts attribute much of the strength to unusually warm weather in April and a later Easter holiday, which combined to pull forward spending. Nevertheless, the 1.8% increase in retail sales over the first quarter— the strongest three-month surge since mid-2021—suggests that consumers may finally be dipping into savings built up over the past two years. Bank of England data show that household deposits grew to nearly £2 trillion by the end of 2024, giving many consumers a cushion if they choose to spend.
Consumer confidence, as measured by GfK’s May survey, climbed modestly to -20, up from -23 in April. While this level remains below pre-pandemic norms, it represents the highest reading since late 2023. Survey respondents cited lower anxiety about unemployment and slightly more positive wage-inflation outlooks as reasons for the uptick. Economists note that with real wage growth edging into positive territory—average earnings were up 5.9% year-on-year in April—households may feel emboldened to increase discretionary outlays after a prolonged period of belt-tightening. Still, given that real incomes have only recently turned positive, many households remain cautious: savings rates are elevated, averaging around 12% of income, a rate not seen since the aftermath of the financial crisis.
Inflation’s Lingering Grip
Despite some encouraging signs on spending, inflation remains stubbornly above the Bank of England’s 2% target. The Consumer Price Index registered 3.5% in April, unchanged from March, reflecting continued upward pressure on food and energy components. Ofgem’s May report indicated that gas and electricity price caps would rise by 6.4% from April, adding roughly £111 to average household bills annually—offsetting hopes for a near-term decline in utility costs. This energy squeeze has complicated the inflation outlook: while global wholesale gas prices have eased slightly since their 2023 highs, domestic suppliers passed through price increases decided in previous months. Economists expect headline inflation to peak near 3.7% in mid-2025 before gradually drifting back toward target in early 2026, assuming there are no further energy price shocks.
Core inflation—excluding volatile food and energy items—has also proved sticky. Shelter-related costs remain elevated as private rents and mortgage costs feed into consumer prices. Commercial landlords have raised rents to cover rising financing costs over the past two years, and those increases have been passed on in service charges and retail rents. Although the Bank of England’s February rate cut (from 4.75% to 4.5%) provided some relief to borrowers, mortgage rates on new fixed-rate deals remain above 5% for many households. As a result, any benefits from lower interest rates are likely to be realized slowly, and inflationary pressures on housing and services could persist into the second half of 2025.
Wage Growth and the Cost of Labor
Earnings in the private sector were up 5.9% on a year-on-year basis in April, outstripping headline inflation for the first time since mid-2023. Public-sector pay settlements have generally lagged behind, but both teachers’ and nursing pay awards this spring were higher than anticipated—3% for core public-sector workers and a 4% increase for NHS staff—narrowing the gap with private-sector wage rises. As wages continue to climb, business surveys suggest that firms face mounting labor costs, particularly in sectors such as hospitality, warehousing, and logistics, where staff shortages remain acute.
Nevertheless, elevated wage growth has not yet translated fully into robust consumer spending. Many households remain apprehensive after periods of negative real incomes in 2023 and early 2024. The surge in personal saving to around 12% of disposable income reflects a collective desire for buffers against future shocks, from further energy cost spikes to geopolitical disruptions. This high savings ratio suggests that even if wage-inflation dynamics strengthen, consumer spending may advance only gradually. Employers must weigh whether to continue granting pay rises above inflation, knowing that higher labor costs could translate into higher prices or slimmer profit margins.
Public Finances Under the Microscope
The October 2024 budget, which raised £40 billion in new tax revenues through higher National Insurance contributions, frozen thresholds, and adjustments to inheritance rules, has tightened discretionary incomes for many households. The chancellor framed these measures as necessary to rebuild public services, allocate £5 billion to affordable housing, and raise education and health capital budgets. Yet the additional tax burden—particularly on higher earners and employers—has injected uncertainty into corporate hiring and investment plans.
The Office for Budget Responsibility (OBR) forecasts that public debt will remain elevated at around 96% of GDP through 2025, prompting the government to signal further spending restraint in departmental budgets. Ministers have hinted that, absent a sharp acceleration in growth, some spending cuts or tax increases may be required in the autumn’s spring statement to keep deficits in check. This has weighed on business sentiment: a CBI survey released earlier this month found that nearly 40% of UK firms expect higher taxes or lower public spending to dampen activity in the next six months. While households may welcome investments in infrastructure and health, the harsh reality of tighter fiscal policy could limit the government’s ability to support growth if downside risks materialize.
Following nine consecutive rate hikes between late 2022 and late 2023, the Bank of England finally trimmed its Bank Rate from 4.75% to 4.5% in February 2025. In the May Monetary Policy Report, the BoE noted that the balance of risks remains “roughly balanced,” citing stronger consumer spending but also persistent core inflation. Although markets had priced in the February cut as the start of a rate-cutting cycle, Bank of England Governor Andrew Bailey emphasized that further easing would depend on sustained progress in bringing inflation down toward 2% without derailing wage growth.
Market participants now expect only one more 25-basis-point cut before year-end, with rate forecasts converging around 4.25% by December. Analysts argue that any dovish pivot beyond that would require clear evidence of a broad slowdown in services inflation and a collapse in wage-price pressures—scenarios that some consider unlikely given ongoing labor shortages. Should headline inflation remain stubbornly above 3%, the Bank may opt to hold rates steady, effectively making February’s cut more of a “one-off” than the start of a sustained easing cycle.
Global Uncertainty and Trade Exposures
ritain’s economic outlook also hinges on external developments. The EU remains the UK’s largest trading partner, taking in nearly 40% of goods exports. While both sides have rolled out new bilateral trade deals since Brexit, frictions still arise over regulatory alignment and non-tariff barriers. In early 2025, the EU threatened retaliatory tariffs on key UK exports—such as Scotch whisky and automotive parts—after a dispute over state aid rules. Though both sides have since paused escalation, the specter of renewed trade skirmishes dampens business investment decisions.
Across the Atlantic, concerns about U.S. protectionism have not fully abated. The Biden administration has hinted at stricter oversight of steel and aluminum imports—industries in which the UK participates through trade agreements with the EU. Any fresh U.S. tariffs could inflate input costs for British manufacturers that rely on imported metals, compounding domestic cost pressures. On the other hand, burgeoning trade talks with India and Southeast Asian markets offer growth opportunities for exporters of machinery, pharmaceuticals, and financial services. Still, these potential gains hinge on successfully navigating complex regulatory environments and geopolitical uncertainties, particularly as China’s economic slowdown threatens to curb global demand for UK goods.
Some sectors have demonstrated resilience amid these headwinds. The technology and creative industries, benefiting from strong global demand for digital services, recorded robust hiring in Q1 2025. Tech hubs in Manchester and Brighton reported vacancy rates 15% higher than the national average, fueled partly by inward migration of skilled workers and government incentives for R\&D. Commercial real estate, however, remains challenged: office vacancy rates in London have hovered around 12%, and rents for Grade A space have fallen 5% year-on-year, as hybrid working persists. Retail property landlords, despite the recent sales uptick, continue to wrestle with structural shifts in consumer habits and online competition.
Manufacturing output has shown modest signs of recovery: the Confederation of British Industry (CBI) reported a three-point uptick in its Manufacturing Output Index for April, driven by increased orders in aerospace and pharmaceuticals. Still, manufacturers cite continuing supply-chain disruptions—particularly for semiconductor chips and specialized machinery components—that curb production capacity. The automotive industry also faces a delicate balance: while electric vehicle (EV) demand is rising, supply constraints in battery components and the higher cost of raw materials threaten to slow rollout plans. Government subsidies for EV growth and infrastructure investments have softened the blow, but any reversal of those incentives could quickly derail progress.
Similarly, the hospitality and leisure sector has bounced back from pandemic lows, with footfall at pubs and restaurants up 10% year-on-year in April. Tourists from the U.S. and EU have returned in greater numbers, buoyed by the weaker pound. Nonetheless, operators warn that rising labor and energy costs could erode margins, particularly during the slower summer months. Recent insolvencies among high-street chains underscore how stretched many businesses remain, even amid rising sales.
Household Finances and Future Spending
The Bank of England’s measures to combat inflation over the past two years—raising rates from 0.1% to as high as 4.75%—left many mortgages on variable or tracker deals out of reach for household budgets. Although February’s cut to 4.5% has eased some pressure, roughly 30% of outstanding mortgages will be up for renewal at rates above 5% later in 2025. Analysts estimate that by year-end, average mortgage payments could absorb 25% of disposable income, up from 22% a year ago. This squeeze may deter further consumer spending, especially on high-value purchases such as cars and home improvements.
Moreover, inflation’s uneven trajectory—food prices remain elevated, and energy bills rose again in April—means that many households have not fully felt the benefits of nominal wage gains. Indeed, the rise in the household savings ratio to around 12% reflects broad caution: many families continue to set aside extra cash against a backdrop of uncertain job prospects and future rate hikes. That said, research suggests that about 40% of those higher savings are stored in easy-access accounts, meaning they could be tapped if confidence holds. Should the spring and summer months bring favorable weather and stable prices, discretionary spending on dining out, travel, and leisure could lift GDP growth by as much as 0.5 percentage point in Q2.
Unemployment ticked up slightly to 3.9% in the three months to April, from 3.8% in the prior period, reflecting cautious hiring by firms uncertain about demand. Job vacancies, however, remain elevated—around 1.2 million at the end of March—indicating persistent labor shortages, especially in healthcare, logistics, and construction. Firms are increasingly turning to recruitment from overseas, but the post-Brexit points-based immigration system has slowed the inflow of skilled workers in key sectors such as IT and engineering.
While wage growth of nearly 6% year-on-year has alleviated some pressure for workers, the rise in labor costs has prompted businesses to consider automation and process improvements. In the long term, sustained skill shortages and tight labor markets could accelerate investment in robotics and AI, boosting productivity. In the near term, however, firms warn that any further rises in employer National Insurance contributions—scheduled to increase from April 2025 as part of the October 2024 budget measures—could force some to delay hires or reduce headcount.
Cautious Optimism Amid Lingering Risks
Taken in isolation, the combination of robust retail sales, improved consumer sentiment, and an interest rate cut suggests that the UK economy could expand by 0.6% to 0.8% in the second quarter—an upgrade from the near-flat growth in Q1. Indeed, several asset managers have raised their full-year GDP forecasts to around 1.2% from 1.0%, citing buoyant private-sector activity. Yet this optimism is tempered by multiple risks: the prospect of renewed energy price hikes, the potential for fiscal tightening in autumn’s spring statement, and looming external headwinds from trade disputes.
Financial markets have responded with a modest rally in gilt yields, which rose slightly on speculation that inflation may prove stickier than anticipated. Sterling briefly touched $1.35 against the dollar after Friday’s data, but remains vulnerable to global risk aversion. Equity markets have proven resilient, with the FTSE 100 trading near 8,200, supported by strong earnings in the energy and materials sectors. Nonetheless, small- and mid-cap stocks—more sensitive to domestic consumer demand—have underperformed, reflecting investor caution about the sustainability of the recent spending surge.
In Westminster, policymakers face a delicate balancing act. Prime Minister’s advisers argue that the brighter economic backdrop bolsters plans to proceed with planned investments in transport, green energy, and R\&D, announced in the October budget. Yet Treasury officials warn that any misstep—inflation rebounding, unemployment climbing—could undermine the narrow fiscal headroom created by recent tax rises. Shadow Cabinet members have seized on this ambiguity, highlighting that voters remain wary of policy reversals and tax hikes ahead of the next general election.
As summer approaches, Britain’s economy appears to be finding its footing. Consumers, flush with savings and higher real incomes, are spending more freely, and businesses are responding by increasing output and filling job vacancies. But despite these encouraging signs, the economic path ahead remains far from certain. High inflation, waning fiscal support, and a fragile global backdrop could easily erode the gains of recent months. For now, Britain’s economy teeters between cautious recovery and latent vulnerability, with positive momentum tempered by a catalogue of downside risks still lying in wait.
(Source:www.forexfactory.com)
Yet despite these upbeat signals, challenges remain. Inflation, though moderating from its 2024 peaks, still stands above the central bank’s 2% target, driven in part by lingering pressures on energy and food prices. Wage growth has begun to outpace headline inflation, but real incomes remain under strain given elevated borrowing costs and higher taxes introduced in the October 2024 budget. Meanwhile, fiscal headwinds—including a government borrowing target that remains ambitious and looming departmental spending constraints—continue to put a ceiling on public-sector contributions to growth. On the external front, global uncertainty—ranging from U.S. tariff threats to China’s slowing demand—poses further downside risks. As a result, many economists caution that while the recent data offer genuine reasons for optimism, Britain is not yet out of the woods.
Stronger Retail Sales Offer a Glimmer of Hope
Retail sales volumes in April rose by 1.2% from March, according to the ONS, outpacing the consensus forecast of a 0.2% increase. This uplift was mainly driven by spending at food stores and household goods outlets, as well as a rebound in non-food categories such as department stores. Clothing retailers also saw year-on-year growth, reversing a lull earlier in the year. Analysts attribute much of the strength to unusually warm weather in April and a later Easter holiday, which combined to pull forward spending. Nevertheless, the 1.8% increase in retail sales over the first quarter— the strongest three-month surge since mid-2021—suggests that consumers may finally be dipping into savings built up over the past two years. Bank of England data show that household deposits grew to nearly £2 trillion by the end of 2024, giving many consumers a cushion if they choose to spend.
Consumer confidence, as measured by GfK’s May survey, climbed modestly to -20, up from -23 in April. While this level remains below pre-pandemic norms, it represents the highest reading since late 2023. Survey respondents cited lower anxiety about unemployment and slightly more positive wage-inflation outlooks as reasons for the uptick. Economists note that with real wage growth edging into positive territory—average earnings were up 5.9% year-on-year in April—households may feel emboldened to increase discretionary outlays after a prolonged period of belt-tightening. Still, given that real incomes have only recently turned positive, many households remain cautious: savings rates are elevated, averaging around 12% of income, a rate not seen since the aftermath of the financial crisis.
Inflation’s Lingering Grip
Despite some encouraging signs on spending, inflation remains stubbornly above the Bank of England’s 2% target. The Consumer Price Index registered 3.5% in April, unchanged from March, reflecting continued upward pressure on food and energy components. Ofgem’s May report indicated that gas and electricity price caps would rise by 6.4% from April, adding roughly £111 to average household bills annually—offsetting hopes for a near-term decline in utility costs. This energy squeeze has complicated the inflation outlook: while global wholesale gas prices have eased slightly since their 2023 highs, domestic suppliers passed through price increases decided in previous months. Economists expect headline inflation to peak near 3.7% in mid-2025 before gradually drifting back toward target in early 2026, assuming there are no further energy price shocks.
Core inflation—excluding volatile food and energy items—has also proved sticky. Shelter-related costs remain elevated as private rents and mortgage costs feed into consumer prices. Commercial landlords have raised rents to cover rising financing costs over the past two years, and those increases have been passed on in service charges and retail rents. Although the Bank of England’s February rate cut (from 4.75% to 4.5%) provided some relief to borrowers, mortgage rates on new fixed-rate deals remain above 5% for many households. As a result, any benefits from lower interest rates are likely to be realized slowly, and inflationary pressures on housing and services could persist into the second half of 2025.
Wage Growth and the Cost of Labor
Earnings in the private sector were up 5.9% on a year-on-year basis in April, outstripping headline inflation for the first time since mid-2023. Public-sector pay settlements have generally lagged behind, but both teachers’ and nursing pay awards this spring were higher than anticipated—3% for core public-sector workers and a 4% increase for NHS staff—narrowing the gap with private-sector wage rises. As wages continue to climb, business surveys suggest that firms face mounting labor costs, particularly in sectors such as hospitality, warehousing, and logistics, where staff shortages remain acute.
Nevertheless, elevated wage growth has not yet translated fully into robust consumer spending. Many households remain apprehensive after periods of negative real incomes in 2023 and early 2024. The surge in personal saving to around 12% of disposable income reflects a collective desire for buffers against future shocks, from further energy cost spikes to geopolitical disruptions. This high savings ratio suggests that even if wage-inflation dynamics strengthen, consumer spending may advance only gradually. Employers must weigh whether to continue granting pay rises above inflation, knowing that higher labor costs could translate into higher prices or slimmer profit margins.
Public Finances Under the Microscope
The October 2024 budget, which raised £40 billion in new tax revenues through higher National Insurance contributions, frozen thresholds, and adjustments to inheritance rules, has tightened discretionary incomes for many households. The chancellor framed these measures as necessary to rebuild public services, allocate £5 billion to affordable housing, and raise education and health capital budgets. Yet the additional tax burden—particularly on higher earners and employers—has injected uncertainty into corporate hiring and investment plans.
The Office for Budget Responsibility (OBR) forecasts that public debt will remain elevated at around 96% of GDP through 2025, prompting the government to signal further spending restraint in departmental budgets. Ministers have hinted that, absent a sharp acceleration in growth, some spending cuts or tax increases may be required in the autumn’s spring statement to keep deficits in check. This has weighed on business sentiment: a CBI survey released earlier this month found that nearly 40% of UK firms expect higher taxes or lower public spending to dampen activity in the next six months. While households may welcome investments in infrastructure and health, the harsh reality of tighter fiscal policy could limit the government’s ability to support growth if downside risks materialize.
Following nine consecutive rate hikes between late 2022 and late 2023, the Bank of England finally trimmed its Bank Rate from 4.75% to 4.5% in February 2025. In the May Monetary Policy Report, the BoE noted that the balance of risks remains “roughly balanced,” citing stronger consumer spending but also persistent core inflation. Although markets had priced in the February cut as the start of a rate-cutting cycle, Bank of England Governor Andrew Bailey emphasized that further easing would depend on sustained progress in bringing inflation down toward 2% without derailing wage growth.
Market participants now expect only one more 25-basis-point cut before year-end, with rate forecasts converging around 4.25% by December. Analysts argue that any dovish pivot beyond that would require clear evidence of a broad slowdown in services inflation and a collapse in wage-price pressures—scenarios that some consider unlikely given ongoing labor shortages. Should headline inflation remain stubbornly above 3%, the Bank may opt to hold rates steady, effectively making February’s cut more of a “one-off” than the start of a sustained easing cycle.
Global Uncertainty and Trade Exposures
ritain’s economic outlook also hinges on external developments. The EU remains the UK’s largest trading partner, taking in nearly 40% of goods exports. While both sides have rolled out new bilateral trade deals since Brexit, frictions still arise over regulatory alignment and non-tariff barriers. In early 2025, the EU threatened retaliatory tariffs on key UK exports—such as Scotch whisky and automotive parts—after a dispute over state aid rules. Though both sides have since paused escalation, the specter of renewed trade skirmishes dampens business investment decisions.
Across the Atlantic, concerns about U.S. protectionism have not fully abated. The Biden administration has hinted at stricter oversight of steel and aluminum imports—industries in which the UK participates through trade agreements with the EU. Any fresh U.S. tariffs could inflate input costs for British manufacturers that rely on imported metals, compounding domestic cost pressures. On the other hand, burgeoning trade talks with India and Southeast Asian markets offer growth opportunities for exporters of machinery, pharmaceuticals, and financial services. Still, these potential gains hinge on successfully navigating complex regulatory environments and geopolitical uncertainties, particularly as China’s economic slowdown threatens to curb global demand for UK goods.
Some sectors have demonstrated resilience amid these headwinds. The technology and creative industries, benefiting from strong global demand for digital services, recorded robust hiring in Q1 2025. Tech hubs in Manchester and Brighton reported vacancy rates 15% higher than the national average, fueled partly by inward migration of skilled workers and government incentives for R\&D. Commercial real estate, however, remains challenged: office vacancy rates in London have hovered around 12%, and rents for Grade A space have fallen 5% year-on-year, as hybrid working persists. Retail property landlords, despite the recent sales uptick, continue to wrestle with structural shifts in consumer habits and online competition.
Manufacturing output has shown modest signs of recovery: the Confederation of British Industry (CBI) reported a three-point uptick in its Manufacturing Output Index for April, driven by increased orders in aerospace and pharmaceuticals. Still, manufacturers cite continuing supply-chain disruptions—particularly for semiconductor chips and specialized machinery components—that curb production capacity. The automotive industry also faces a delicate balance: while electric vehicle (EV) demand is rising, supply constraints in battery components and the higher cost of raw materials threaten to slow rollout plans. Government subsidies for EV growth and infrastructure investments have softened the blow, but any reversal of those incentives could quickly derail progress.
Similarly, the hospitality and leisure sector has bounced back from pandemic lows, with footfall at pubs and restaurants up 10% year-on-year in April. Tourists from the U.S. and EU have returned in greater numbers, buoyed by the weaker pound. Nonetheless, operators warn that rising labor and energy costs could erode margins, particularly during the slower summer months. Recent insolvencies among high-street chains underscore how stretched many businesses remain, even amid rising sales.
Household Finances and Future Spending
The Bank of England’s measures to combat inflation over the past two years—raising rates from 0.1% to as high as 4.75%—left many mortgages on variable or tracker deals out of reach for household budgets. Although February’s cut to 4.5% has eased some pressure, roughly 30% of outstanding mortgages will be up for renewal at rates above 5% later in 2025. Analysts estimate that by year-end, average mortgage payments could absorb 25% of disposable income, up from 22% a year ago. This squeeze may deter further consumer spending, especially on high-value purchases such as cars and home improvements.
Moreover, inflation’s uneven trajectory—food prices remain elevated, and energy bills rose again in April—means that many households have not fully felt the benefits of nominal wage gains. Indeed, the rise in the household savings ratio to around 12% reflects broad caution: many families continue to set aside extra cash against a backdrop of uncertain job prospects and future rate hikes. That said, research suggests that about 40% of those higher savings are stored in easy-access accounts, meaning they could be tapped if confidence holds. Should the spring and summer months bring favorable weather and stable prices, discretionary spending on dining out, travel, and leisure could lift GDP growth by as much as 0.5 percentage point in Q2.
Unemployment ticked up slightly to 3.9% in the three months to April, from 3.8% in the prior period, reflecting cautious hiring by firms uncertain about demand. Job vacancies, however, remain elevated—around 1.2 million at the end of March—indicating persistent labor shortages, especially in healthcare, logistics, and construction. Firms are increasingly turning to recruitment from overseas, but the post-Brexit points-based immigration system has slowed the inflow of skilled workers in key sectors such as IT and engineering.
While wage growth of nearly 6% year-on-year has alleviated some pressure for workers, the rise in labor costs has prompted businesses to consider automation and process improvements. In the long term, sustained skill shortages and tight labor markets could accelerate investment in robotics and AI, boosting productivity. In the near term, however, firms warn that any further rises in employer National Insurance contributions—scheduled to increase from April 2025 as part of the October 2024 budget measures—could force some to delay hires or reduce headcount.
Cautious Optimism Amid Lingering Risks
Taken in isolation, the combination of robust retail sales, improved consumer sentiment, and an interest rate cut suggests that the UK economy could expand by 0.6% to 0.8% in the second quarter—an upgrade from the near-flat growth in Q1. Indeed, several asset managers have raised their full-year GDP forecasts to around 1.2% from 1.0%, citing buoyant private-sector activity. Yet this optimism is tempered by multiple risks: the prospect of renewed energy price hikes, the potential for fiscal tightening in autumn’s spring statement, and looming external headwinds from trade disputes.
Financial markets have responded with a modest rally in gilt yields, which rose slightly on speculation that inflation may prove stickier than anticipated. Sterling briefly touched $1.35 against the dollar after Friday’s data, but remains vulnerable to global risk aversion. Equity markets have proven resilient, with the FTSE 100 trading near 8,200, supported by strong earnings in the energy and materials sectors. Nonetheless, small- and mid-cap stocks—more sensitive to domestic consumer demand—have underperformed, reflecting investor caution about the sustainability of the recent spending surge.
In Westminster, policymakers face a delicate balancing act. Prime Minister’s advisers argue that the brighter economic backdrop bolsters plans to proceed with planned investments in transport, green energy, and R\&D, announced in the October budget. Yet Treasury officials warn that any misstep—inflation rebounding, unemployment climbing—could undermine the narrow fiscal headroom created by recent tax rises. Shadow Cabinet members have seized on this ambiguity, highlighting that voters remain wary of policy reversals and tax hikes ahead of the next general election.
As summer approaches, Britain’s economy appears to be finding its footing. Consumers, flush with savings and higher real incomes, are spending more freely, and businesses are responding by increasing output and filling job vacancies. But despite these encouraging signs, the economic path ahead remains far from certain. High inflation, waning fiscal support, and a fragile global backdrop could easily erode the gains of recent months. For now, Britain’s economy teeters between cautious recovery and latent vulnerability, with positive momentum tempered by a catalogue of downside risks still lying in wait.
(Source:www.forexfactory.com)
