The UK economy faces headwinds in the year ahead as recent budget tax hikes take their toll on consumer confidence and threaten to stifle wage growth, according to troubling new reports from S&P Global Market Intelligence and Goldman Sachs.
Consumer Sentiment Takes a Hit
In a concerning development, S&P Global Market Intelligence’s latest survey reveals that UK consumer confidence dropped in November as households expressed growing pessimism about the economy’s trajectory and their own financial prospects. The consultancy firm notes that the government squandered an opportunity to capitalize on the underlying improvement in consumer sentiment observed in the months surrounding the general election.
The consumer sentiment index, a composite measure tracking factors such as consumer financial wellbeing, employment, spending, savings and debt, fell to 46.9 in November from 47.3 the previous month. A reading below 50 signals contraction.
A key concern going forward will be the labour market. Rising incomes and busier workplaces have underpinned much of the improvement in consumer sentiment over the past two years, but job security is showing signs of waning.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
Williamson cautions that any intensification of job anxieties, potentially triggered by recent budget measures like the increase in employer national insurance contributions, could further erode consumer confidence. This would likely have a knock-on effect, depressing consumer spending and economic growth.
Wage Growth Under Pressure
Meanwhile, analysts at Goldman Sachs predict that the £20 billion hike in employer national insurance contributions unveiled in the budget will compel companies to shift some of the burden onto workers in the form of lower wage increases.
The investment bank anticipates that private sector pay growth will decelerate as a consequence, contributing to a moderation in consumer spending growth in the latter half of next year as gains in real disposable income taper off.
Short-Term Boost, Longer-Term Pain
Ironically, the UK economy may enjoy a brief boost in the near term due to the budget’s provisions for increased Whitehall spending and public sector pay raises. However, this mini boom is likely to be short-lived.
The millions of mortgage holders hoping for a reprieve may have to wait longer than anticipated. Although the Bank of England has lowered interest rates twice this year to 4.75%, Goldman Sachs no longer expects a further cut next month, pushing back projections for additional easing until 2025.
The tough climate facing households has prompted a growing belief that interest rates will fall again, which should help alleviate some of the financial pressure on borrowers. However, the fact that confidence fell in November despite the Bank of England cutting interest rates suggests lower borrowing costs alone may be insufficient to turn the tide and lift sentiment.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
Trade Tensions Compound Woes
As if domestic challenges weren’t enough, the UK also faces economic drag from heightened global trade tensions in the aftermath of the U.S. election. Goldman Sachs warns that uncertainty surrounding potential new U.S. tariffs is likely to weigh on demand and generate spillover effects from reduced euro area growth, even if Britain manages to sidestep the harshest measures.
The Centre for Economics and Business Research estimates that the imposition of a 60% U.S. tariff on China and a 20% levy on all other imports could shave 0.9% off the UK economy by the end of the administration’s term, assuming no retaliation from other countries. Retaliatory actions could inflate energy prices and household bills.
Trump’s re-election could reshape global dynamics, particularly in trade, energy, and environmental policy.
The Centre for Economics and Business Research
Weathering the Storm
As the UK economy navigates this gauntlet of challenges, policymakers and business leaders will need to remain nimble and proactive. Bolstering consumer and business confidence will be crucial to sustaining the recovery’s momentum. This may require a delicate balancing act between fiscal prudence and targeted measures to support jobs, incomes, and investment.
While the road ahead appears bumpy, the UK has repeatedly demonstrated its resilience in the face of adversity. With a clear-eyed assessment of the risks and a dedication to evidence-based policymaking, the nation can chart a course toward a brighter economic future.
