President Trump recently announced the imposition of tariffs on some of America's trading partners, signaling potential economic shifts in the upcoming quarters. Analysts predict additional levies as the global economic landscape evolves. Amid these changes, economic forecasts are adjusting, with a notable revision in the UK's growth outlook for 2025. Initially set at 1.3%, the forecast has been lowered to 1.0%, primarily due to an anticipated slowdown in the latter half of 2024.
The UK labour market faces susceptibility to further weakening as firms navigate a series of headwinds. The Bank of England (BoE) may opt for swifter interest rate cuts if labour market metrics reveal clear signs of deterioration. However, the current labour market remains "broadly in balance," according to the BoE, with vacancies having returned to pre-COVID levels.
"A natural process of rebalancing post-COVID has resulted in a labour market 'broadly in balance', according to the Bank of England (BoE), with vacancies back to pre-COVID levels."
- Christopher Graham and Saabir Salad
Despite this equilibrium, employment growth in the UK has been on a steady decline. Recent surveys highlight pressures on firms from government fiscal policy, such as the rise in employer National Insurance Contributions (NICs) and the forthcoming increase in the national minimum wage. Both measures are set to take effect in April, exacerbating existing challenges.
"However, employment growth has been steadily declining and recent surveys point to pressures on firms stemming from government fiscal policy, including the rise in employer National Insurance Contributions (NICs) announced at last Autumn’s Budget and the upcoming rise in the national minimum wage (both set to come into effect in April)."
- Christopher Graham and Saabir Salad
The BoE's response to labour market data is complicated by inflation dynamics and issues with data quality. Given the weak growth momentum and high energy costs, labour demand may experience sustained pressure. The BoE could accelerate its pace of rate cuts if signs of labour market weakening become apparent.
"Given weak growth momentum and elevated energy costs, labour demand could come under sustained pressure going forward. The BoE’s reaction function to labour market data is not straightforward, given not only inflation dynamics this year but also data quality issues on the labour market side. However, on balance, we would expect a faster pace of rate cuts from the BoE should labour market metrics show a clear deterioration."
- Christopher Graham and Saabir Salad
Looking ahead to 2025, there is an expectation of slightly stronger growth. This optimism is rooted in anticipated gradual monetary easing and government measures aimed at stimulating economic activity. Such policies could help mitigate some of the challenges currently faced by firms and contribute to overall economic resilience.