Britain has experienced a year of substantial realignment. Its economy fell behind other European nations, enduring a brief recession in 2023.
The U.K. labor market has been strong throughout the current cycle; despite ups and downs, the unemployment rate has held under 4.5%, a historically low level. Worker departures in the wake of Brexit have kept the labor market tight. Wage gains have persisted, and are a lingering inflationary risk. This is not an altogether bad outcome for British households, many of which were able to navigate the impact of rising interest rates on mortgage payments.
Can the U.K. chart a new course for growth?
Persistent inflation fostered caution at the Bank of England as it contemplated easing. However, slowing fundamentals allowed the process to start. We expect further rate cuts the year ahead, implemented at a gradual pace. As in other markets, the data will dictate.
Conservatives struggled to steer the economy after Brexit, and were forced into tight fiscal policy after the 2022 gilt crisis. This added to the nation’s more recent underperformance. Following ten years of Conservative rule, the Labor Party retook power in 2024 and set a new fiscal trajectory for the nation. The proposed budget includes a broad array of taxes and additional funding for healthcare and education. Debt service is absorbing more and more government revenue, crowding out productive investment.
The U.K. lacks upside potential. Economic independence has not delivered the promised gains (nor, in fairness, has it wrought the worst downside outcomes). Export demand is limited amid a tense relationship with continental Europe and a rapidly-shifting trade stance from the United States. Consumption will help in the short-term, but long-term limitations of population and productivity need to be addressed.
Click on the chart to zoom in and explore the data.
