Is the UK economy on the mend following Budget fallout?
It is fair to say that the government’s growth agenda has not got off to a good start.
The economy is only slightly larger than it was at the time that Labour took office, while GDP per head actually fell in the second half of last year.
Following a succession of downside surprises towards the end of last year, forecasters – most notably the Bank of England – have steadily reduced their growth projections for 2025.
This will likely presage a similar move from the Office for Budget Responsibility (OBR) next month, forcing Rachel Reeves to make some difficult decisions to meet her “ironclad” fiscal rules.
But a number of commentators have suggested that the downturn might have bottomed out having digested the latest flurry of economic data.
“Conditions are hardly rosy, but UK data surprises have turned positive for the first time since October 29,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.
Kallum Pickering, chief economist at Peel Hunt, was also relatively optimistic. “If the latest trend is anything to go by, it (the economy) can still beat excessively downbeat expectations,” he said.
Signs of improvement?
Taking a step back, most forecasters still expect the UK economy to accelerate compared to last year.
This relies on two underlying factors which have not been endangered by the latest figures: improving consumer spending and a solid labour market.
Start with consumer spending. Retail sales comfortably surpassed expectations in January, rising 1.7 per cent, the largest monthly increase since May.
Statisticians were wary of painting too rosy a picture, pointing out that food sales had driven a large part of the increase as households cut back on eating out, but it still suggests the UK economy is not performing quite as badly as some have suggested.
Simon French, head of research at Panmure Liberum, said it was an “encouraging” start to the quarter and should “draw a line under some of the most bearish fears” about the economy.
Combined with GfK’s long-running consumer confidence index, which rose to a fourth month high, and there were some promising signs of green shoots (or at least encouraging bulbs).
Every measure in GfK’s survey got better, with meaningful improvements in households’ view of their own financial position and the likelihood that they would make major purchases.
Wood at Pantheon noted that the major purchases reading has the strongest correlation with retail sales, suggesting it was consistent with sales volumes rising 1.5-2.0 per cent quarter-on-quarter.
In the grand scheme of things consumer confidence is still low, there’s no doubting that, but things might be moving in the right direction.
Resilient labour market
The latest figures on the labour market were also more positive than expected, given the exceptionally gloomy picture which had been painted by business surveys.
As a reminder, the PMI – one of the most closely watched surveys – suggested that businesses were cutting jobs at the fastest pace since the financial crisis in the final two months of last year.
In contrast, official figures showed that unemployment was 4.4 per cent in the final quarter of 2025, unchanged on the previous quarter.
Its true that unemployment figures are unreliable because of low response rates, but other parts of the labour market report – not subject to the same issues – were also positive.
Early estimates of payrolled employment in January were in positive territory for the first time since last August, the figures showed, with growth of 21,000.
Another survey from the Recruitment and Employment Confederation (REC) showed a seven per cent increase in the number of vacancies during January, the first increase since last June.
“It is too soon for gloom about the UK economy’s prospects overall for 2025,” Kate Shoesmith, deputy chief executive at the REC said.
“The increase in job postings is a clear sign that employers will hire when they need to.”
Risks
All of this could be put in danger in April, when the national insurance hike and the hefty minimum wage increase actually come into force, and business surveys continue to point to downside risks.
But it is worth being clear about what most of these surveys actually measure. Mostly the surveys capture how many firms are cutting jobs, not how many jobs will be lost. One job loss counts as much as 100.
This means the signal from employment surveys can be exaggerated. And in recent months the extent of job losses has definitely been exaggerated.
None of this is to say that the UK economy is performing especially well. But it does point to underlying resilience.
Looking across the economy, households are in a secure financial position while businesses still clearly want to hire the right people, despite looming cost increases.
The government needs to nourish these green shoots.