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While British real GDP growth has been revised upwards recently and is forecasted to be higher than in the neighbouring euro zone, macroeconomic conditions remain challenging. Problematically, confidence indicators are weak, labour market conditions are deteriorating and inflation has moved higher over the past months.
After having dropped to a new all-time low during the cost-of-living crisis in 2022, UK consumer confidence recovered steadily up until mid-2024. Unfortunately, after having reached -13 points in July and August 2024, readings started to deteriorate again and remained in a -17 to -23 points corridor between September 2024 and August 2025 1. Positively, the current reading of -17 points is the best since December 2024 but it remains still deep in negative territory, meaning that there are more pessimistic households than optimistic ones.
Source: NIQ GfK
That said, the latest consumer confidence data from research firm NIQ GfK shows that British households have become more upbeat about the twelve months ahead. While survey respondents scored their “personal finances over the past 12 months” negatively (-4 points in August, up from -7 in July) the “personal finances over the next 12 months” sub-index came in at 5 points, up from 2 points previously. Problematically, consumers are fairly pessimistic about the macroeconomic backdrop over the next twelve months; the corresponding sub- index has deteriorated from an already low -29 points in July to -30 points in August (it was -15 points in August 2024).
Equally problematic for companies operating in the British B2C market, households’ savings rates have increased over the past years as consumers have ramped up precautionary savings amidst the sluggish economic performance. In Q4 2024, the households’ savings ratio (in % of post-tax income) reached 12.0%, the highest reading since 1982 (if the heavily distorted Covid lockdown years are excluded), thereby reducing households’ discretionary spending budgets 2. In early 2025, the savings ratio moderated to 10.9% (the first reduction in three years) but data from the Office for National Statistics (ONS) shows that savings ratios are still around twice as high as in 2017-19.
Source: ONS, note that mandatory lockdowns during Covid artificially inflated the 2020-21 readings
As British households continue to put more money aside (also driven by higher savings for retirement as the share of workers enrolled in defined-benefits company pensions has fallen from 3.6m in 2006 to under 1m in 20223), private consumption in the UK is likely to remain weaker than initially anticipated.
Worryingly, business confidence indicators in the UK also point to underlying issues, at least in the manufacturing and the construction sectors. In the construction sector, the Purchasing Managers’ Index (PMI, compiled by S&P Global) came in at 45.5 points in August. Although this up from July’s five-year low of 44.3 points, it is still far below the neutral 50-points line that divides expansion in sectoral activity from contraction. The residential (44.2) and civil engineering (38.1) sub-indices are substantially below the neutral 50-points line with commercial building (47.8) performing somewhat better4. Disturbingly, the new order sub-index remained in contraction territory for the eighth consecutive month, indicating likely output problems in 2026.
Source: S&P Global
In the manufacturing sector (which accounts for around 17% of UK GDP), high frequency data and confidence indicators also point to challenging operating conditions. The corresponding PMI dropped to 47.0 points in August, down from 48.0 points in July5. The PMI has been below the neutral 50-points line for eleven consecutive months now and new order inflow fell by one of the fastest speeds seen over the past two years. Exporters suffered in particular with new export order inflow contracting for the 43rd consecutive month, despite the UK recently signing trade deals with the EU and the US.
Positively, the UK service sector (responsible for around 80% of British GDP) bucks the negative trend. The service sector PMI came in at 54.2 points in August, up from 51.8 points one month earlier6. The PMI has remained in growth territory for the fourth month running and the August reading was the highest in sixteen months. The “business expectations for the twelve months ahead” sub-index also improved, reaching a ten-month high.
Also positively, new order inflow turned positive again, coming in on the best reading since September 2024. Export orders also increased for the first time since March 2025 but spare capacity and rising input costs still weigh on the sector. As a result, the employment sub-index stands below the neutral 50-points line for the eleventh consecutive month, the longest period of contraction since 2008-2010 (if the Covid years are ignored).
Data from the ONS’ latest Business Insight and Conditions Survey also highlights persistent obstacles for UK businesses. In the September survey (based on data collected in July), 24% of respondents reported falling turnover while only 16% saw an increase in revenue7. Worryingly, the share of companies expecting business performance to deteriorate over the twelve months ahead has increased from 9% in mid-2024 to now 16% (18% expect improvements, 45% no change). According to the survey, the biggest problem for UK companies at the moment is economic uncertainty (25%) with labour costs (19%) and material costs (18%) also being mentioned frequently.
Latest real GDP data from the ONS shows that the UK economy grew by 0.3% quarter on quarter (q/q) in April to June. In a year on year (y/y) comparison, real GDP is up by 1.2%. Although the q/q growth rate in Q2 is down from 0.7% in the first quarter of 2025, it still compares favourably against most other G7 countries. Germany and Italy have both reported real GDP contractions in Q2 which brings these economies close to a recession (defined as two consecutive quarters of real GDP contractions).
Source: ONS and IMF
Also positively, the prospect of a global trade war has diminished somewhat in mid-2025 as many countries signed trade deals with the US. London and Washington negotiated a free trade agreement in May, introducing a 10% tariff on UK exports to the US in most sectors. Although significantly up from the previous US effective tariff rate of around 2% during the Biden-years, the deal provides much needed clarity for UK exporters after a turbulent H1 2025 when much higher tariffs were proposed by the US administration8.
Furthermore, the UK and the EU have agreed on removing some trade barriers during a summit in May. In exchange for continued access to UK territorial waters for EU fishing boats, Brussels has agreed on removing certain sanitary and phytosanitary requirements, making it easier for the UK farming and fishery sectors to sell to the continent9.
Inflation has moderated substantially between late 2022 and mid-2024 but consumer prices have become a more pressing issue again over the past 12 months. After having fallen from a 40-year of 9.6% in October 2022 to 2.6% only in September 2024, the consumer price index including owner occupiers’ housing costs (CPIH) has gradually increased again. In July 2025, the CPIH had reached 4.2% again, the highest reading since January 2024 and far above the Bank of England’s inflation target of 2%11 .
Source: ONS
Like in many other economies, UK inflation continues to be driven by the service sector although the gap to the manufacturing sector has started to decrease: goods price inflation stood at 2.7% in July 2025 (up from negative figures in Q2 and Q3 2024) but service sector inflation came in at 5.2%, down from 5.8% at the beginning of the year.
Positively, the BoE expects inflationary pressures to peak in September before falling again12, a view shared by many other experts. The average Q4 2025 CPI forecast (which excludes housing costs) amongst economists surveyed by the UK Treasury stood at 3.3%, the 2026 forecast stands at 2.3%13. As many companies are passing on increased wages and higher national insurance contributions, inflation will likely continue to overshoot the BoE 2% inflation target until 2026. This limits the BoE opportunities to cut key policy rates further. The Bank’s latest rate cut in early August (the fifth cut in twelve months) was passed only narrowly in the Monetary Policy Committee with an unprecedented second round of voting required to eventually reach a 5-4 majority. As a consequence of the latest inflation figures and the tight voting result, markets no longer expect further interest rate cuts in the remainder of 202514.
The UK labour market has cooled down somewhat in 2024 and 2025 year-to-date, caused by subdued economic growth but also because of higher wage costs (which has reduced labour demand). According to data from the ONS, the seasonally-adjusted unemployment rate stood at 4.7% in May 2025, up from 4.2% one year earlier15. However, despite the recent increase, unemployment is still low in an international comparison (unemployment in the neighbouring eurozone stood at 6.2%) and it remains fairly close to the full-employment definition of 4%.
Source: ONS
During the remainder of 2025, unemployment is likely to rise moderately, caused by the effects of a higher minimum wage and increased national insurance contributions (which came into effect in April). That said, the anticipated increase will be rather small: in August, the BoE lowered its 2026 unemployment rate forecast in its Monetary Policy Report; it now expects unemployment to come in at 5% in mid-2026, slightly above its assumed medium-term equilibrium rate16.
Similar to the unemployment rate, job vacancies in the UK have been deteriorating too. After reaching a new all-time high of 1.3m open positions in mid-2022, job vacancies have been declining more or less steadily for the past three years. The figure dropped below the 1m mark in June-August 2023 and decreased to 718k in May to July 2025, below the pre-Covid reading of 811k in Q4 2019. Ignoring the distorted Covid-years, the current job vacancies reading is the lowest since late 2014. This indicates companies’ unwillingness to create new positions or to replace leavers17.
Source: ONS
The job vacancy rate (which measures the number of vacancies per 100 employee jobs) has roughly followed this trend. The national average came in at 2.2 in the three months to July 2025, compared with 2.7 in Q4 2019 (and 4.2 in mid-2022). Compared with pre-Covid, the vacancy ratio in the accommodation and food service sector (from 3.7 to now 2.9), manufacturing (was 2.1, now 1.9) and wholesale and retail trade (from 2.8 to 2.1) have all decreased with construction (up from 1.7 to now 2.0) being the only outlier. Looking ahead, the increased national insurance contribution and the recent robust wage growth (also fuelled by a higher minimum wage) will likely lead to a further drop in vacancies.
Meanwhile, salary developments have responded to the lacklustre labour market performance over the past quarters. Although nominal wage growth was substantial during the cost-of-living crisis in 2022-23, pay increases were not sufficient to compensate workers for the loss of purchasing power. As a consequence, real wage growth (calculated by subtracting the inflation rate from the nominal wage growth rate) was negative from spring 2022 to spring 2023. However, following substantial nominal wage growth in 2023, peaking at 8.3% y/y in May to July (the highest rate since comparable records began in 2001) and lower inflation, real wage growth accelerated quickly: it came in at 2.6% y/y in October to December 2024, the highest rate since mid-2015 (outside pandemic years)18.
Source: ONS
In the first seven months of 2025, wage growth has slowed down markedly though. In nominal terms, earnings increased by 4.6% y/y in the three months to July while in real terms, wage growth is barely positive. In May to July, real wages increased by a paltry 0.5% y/y, also caused by inflation picking up again. This is despite the (nominal) minimum wage rising by around 7% in April 2025 and by 17% since 202319.
Looking ahead, the sluggish economy and the relatively high inflation rate should lead to comparatively low real wage increases in the remainder of 2025 and 2026. At the lower end of the wage spectrum, the rapid rise of the minimum wage (which, in nominal terms, has increased by 56% since March 2018) has created substantial cost increases for companies, also because of higher national insurance contributions. This has a negative effect on the demand for labour, leading to lower employment in this part of the British labour market.
Despite the relatively lacklustre economic performance in the UK, credit risk levels have improved in 2024. Against the wider regional trend, the number of business failures has fallen and average B2B payment delays have decreased, too. In the first half of 2025, this positive trend has come to a halt though: bankruptcies have stabilised on a relatively high level while payment delays have lengthened somewhat again. Amidst the disappointing macroeconomic backdrop and the higher labour costs, credit risk is likely to increase further in H2 2025 and 2026.
Data from business information provider Dun & Bradstreet and its European partners shows that B2B payments performance in the UK has improved against the regional trend. Between Q4 2023 and Q4 2024, average payment delays (beyond agreed terms) fell from 13.0 days to 10.8 days in the UK, a multi-year low. During the same period, the European average lengthened marginally by 0.1 days to 12.2 days.
Source: Dun & Bradstreet
Problematically, performance deteriorated in H1 2025 with the average delay in the UK increasing from 10.8 days in Q4 2024 to now 11.7 days. That said, the UK is still ranked below the European average (12.3 days) and only outperformed by the Netherlands (3.2 days) and Germany (5.7 days)20. The risk of late payment is likely to rise over the next quarters as companies are struggling to maintain profitability.
Encouragingly, the UK is one of a few select European states that has seen a drop in corporate liquidations in 2024. After hitting a thirty- year high in 2023, the number of company insolvencies in England and Wales dropped to 23,878 in 2024. While this is down by 5% against prior year, it is still significantly above the pre-Covid reading of 17,170 insolvencies in 201921. Meanwhile, Northern Ireland has seen another increase in corporate liquidations last year (from 218 to 305) while Scotland saw a stagnation (1,236 failures in 2024 after 1,234 in 2023).
Source: UK Government Insolvency Service
Problematically, data from the UK government’s insolvency service shows that the number of company insolvencies in England and Wales has stagnated on relatively high levels in January-July 2025. In the first seven months of this year, 14,449 companies became insolvent, virtually unchanged from the same period one year earlier (14,445). In the twelve months to July 2025, one in 190 active companies entered insolvency proceedings in England and Wales (equivalent to 52.5 out of 10,000 companies). This compares favourably against 56.6 per 10,000 companies in the same period one year earlier and is also considerably below the all-time high of 113.1 insolvencies per 10,000 companies during the 2008-09 recession. That said, the insolvency outlook for the second half of 2025 and 2026 is troubled as above medium-term average interest rates, tight lending conditions, subdued demand and pressure on profit margins all create challenges for UK companies.
References
[2] https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/dgd8/ukea
[3] https://www.investorschronicle.co.uk/content/5d4d918c-2568-59c3-b532-65613a960232
[4] https://www.pmi.spglobal.com/Public/Home/PressRelease/d53e54e883da40448dcb05af5ed1bf26
[5] https://www.pmi.spglobal.com/Public/Home/PressRelease/45d09a10392843948f5cc0b0150cc2f9
[6] https://www.pmi.spglobal.com/Public/Home/PressRelease/6cc2cf22e50541de84d7bf7904678c06
[7] https://www.ons.gov.uk/releases/businessinsightsandimpactontheukeconomy4september2025
[8] https://commonslibrary.parliament.uk/research-briefings/cbp-10240/
[9] https://www.bbc.com/news/articles/czdy3r6q9mgo
[10] https://www.imf.org/en/Publications/WEO/Issues/2025/07/29/world-economic-outlook-update-july-2025
[11] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july2025
[12] https://www.bankofengland.co.uk/monetary-policy-report/2025/august-2025#section2
[15] https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms
[16] https://www.bankofengland.co.uk/monetary-policy-report/2025/august-2025
[19] https://www.gov.uk/national-minimum-wage-rates
[21] https://www.gov.uk/government/statistics/company-insolvencies-july-2025
