The Intermediary – June 2025 - Flipbook - Page 7
RESIDENTIAL
Opinion
Economy steadies,
but there’s a bumpy
road ahead
T
his commentary was
wrien on the morning
of the Chancellor’s
Spending Review
before any formal
announcements. Events
may have moved on by the time of
publication, but the pressures and
challenges outlined still sit at the heart
of the UK’s economic outlook.
The UK economy is showing
signs of stabilising. Aer months of
patchy data and political noise, we’re
beginning to see a more coherent –
albeit cautious – narrative emerge.
The International Monetary Fund
(IMF) has nudged its 2025 growth
forecast for the UK up to 1.2%, with
1.4% expected the following year.
That’s a positive development, but the
message from the IMF is also clear:
without a step-change in productivity,
longer-term prospects remain
underwhelming.
Government ministers have
welcomed the update. The Chancellor
pointed to strong early-year growth
and international support for her
economic plan. But look beyond the
top-line figures, and a more fragile
picture comes into focus.
Since the Autumn Budget,
more than 270,000 jobs have been
lost, marking the steepest drop in
employment since the early stages of
the pandemic. The rise in National
Insurance Contributions (NICs) for
employers has been widely cited as a
contributing factor, particularly in
sectors like hospitality and retail. For
businesses already managing higher
borrowing costs and shaky consumer
confidence, this additional overhead
has been difficult to absorb.
Unemployment has now risen
to 4.6%, the highest in nearly four
years. Although questions remain
around the quality of the Office for
National Statistics’ (ONS) labour force
data, the direction of travel is clear.
Redundancies are up, vacancies are
down, and confidence is fragile.
The Bank of England has responded
by starting to loosen monetary policy.
The Bank Rate now sits at 4.25% aer
four cuts, with more expected before
the year is out. Inflation is falling
back, and forecasts suggest it may
drop below 3% in early 2026, which
should give the Bank more flexibility
to support growth.
That said, for borrowers, the
benefits of rate cuts have been limited
so far. While some expected mortgage
rates to fall in step with the Bank Rate,
the reality has been more subdued.
Most lenders had already priced in
expected cuts.
Swap rates are higher than they
were this time last month, reflecting
wider market caution and ongoing
geopolitical uncertainty, particularly
from the US. As a result, the expected
wave of cheaper mortgage deals has
yet to materialise. The housing market
has, unsurprisingly, remained flat.
Transaction volumes are subdued, and
while prices have held up beer than
many anticipated, overall activity
remains well below typical levels.
With buyers still constrained by
affordability, especially in the South
and major cities, it’s difficult to see
momentum returning in the shortterm unless there’s a material shi in
rates or employment confidence.
The Spending Review may go some
way to clarifying the Government’s
position. Departments are awaiting
their budgets through to 2029, and the
pressure to invest in public services
without spooking the markets is acute.
Defence and healthcare are expected
to receive priority, but with borrowing
already elevated, further tax changes
are hard to rule out.
NICHOLAS MENDES
is mortgage technical manager
at John Charcol
This is where politics and economics
begin to rub up against one another.
The Chancellor has built her fiscal
stance around discipline and
credibility, but critics argue it risks
suppressing the very growth she aims
to support. Talk of a ‘double debt
mountain’ – both formal borrowing
and hidden liabilities – is becoming
more prominent in policy circles, and
investors will be watching closely.
For now, sterling remains relatively
strong, up around 8% against the
dollar this year. But much of that has
more to do with US uncertainty than
UK strength. The pound’s position
may prove fragile if growth falters or
if international investors lose faith
in the UK’s ability to balance growth
with control.
Real wage growth has provided
a degree of short-term support
to households, and consumer
spending has proven more resilient
than expected. But with job losses
mounting and pay growth beginning
to slow, that buffer may not last.
Wages are now rising at 5.2% annually,
down from previous months, and
further soening seems likely.
In many ways, the next six
months could be decisive. If the Bank
can continue to ease rates, if the
Government can avoid overcorrection
on tax, and if business sentiment
stabilises, we could see a more durable
recovery emerge. But that’s still
a big ‘if’.
At present, this remains a recovery
that feels vulnerable – moving
forward, yes, but without much
margin for error. ●
June 2025 | The Intermediary
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