Week in Review: Signs of stability amid fiscal clouds
Martin Beck, Chief Economist | Economic Consulting and Analysis
Quick take:
The labour market is showing signs of stabilisation after earlier softening in employment.
Pay growth is slowing; inflation pressures from wages continue to ease.
UK GDP rose 0.1% in August with underlying momentum improving slightly.
Budget tax hike fears continue to weigh on confidence and hiring intentions.
We think growth will pick up modestly in 2026; risks to outlook remain high.
After a run of disappointing data through the summer, the past week brought tentative signs that the UK economy may be finding its footing. The latest releases on the labour market and GDP point to stabilisation rather than renewed weakness. But with the Budget looming and tax hikes in prospect, the economy remains fragile.
Labour market shows hints of stabilisation
The latest labour market figures suggest that conditions may be levelling off after a period of softening. Payroll employment dipped by just 10,000 in September, a modest fall in a workforce of 30.3 million, while August’s decline was revised away to show a slight rise. And private sector payrolls rose for the first time since May 2024 (Figure 1).
Figure 1: The deterioration in payrolled employment has levelled off
Vacancies continued to edge lower in the three months to September, extending a three-year downtrend, but the latest drop was the second smallest since mid-2022. Redundancies remained low, though the unemployment rate in the three months to August rose to 4.8% on the Labour Force Survey measure, a 51-month high. But this was driven by an erratic-looking jump in the single month measure in August and lingering reliability issues with the survey mean that figure should be treated with caution.
April’s rise in employer National Insurance Contributions and the sharp hike in the National Living Wage have clearly weighed on hiring. However, data over the summer suggest the worst of the adjustment may be passing. Even so, the jobs market remains more fragile than at any time in recent years: vacancies are almost 15% below pre-pandemic levels, the unemployed-to-vacancies ratio is at a four-year high, and business surveys point to continued hiring caution amid Budget-related uncertainty.
Softer labour demand is feeding through to pay growth. Private-sector regular earnings rose by 4.4% in the three months to August, the weakest pace since January 2022 and slightly below the Bank of England’s Q3 forecast of 4.6%. With last year’s strong pay gains soon dropping out of the annual comparison, wage growth is likely to decelerate further into late-2025.
Taken together, these trends suggest that inflationary pressures from the labour market are continuing to ease, keeping alive the possibility of another interest rate cut before year-end, a move not currently priced into markets. Whether that happens will depend in part on the scale of fiscal tightening in the forthcoming Budget. With speculation mounting over a significant package of tax rises, the Bank may feel compelled to move faster to cushion the blow. A painful Budget could, paradoxically, deliver one silver lining.
GDP data point to modest growth
The latest GDP figures add to the sense of gradual stabilisation. The economy grew by 0.1% in August after July’s stagnation, which the ONS has now revised down to a small contraction (Figure 2). Given the volatility and frequent revisions in monthly GDP, one month’s numbers shouldn’t be over-interpreted. Even so, underlying momentum has improved: three-month-on-three-month growth picked up to 0.3% from 0.2% in July.
Figure 2: The economy returned to growth in August
The economy still faces obstacles to sustaining a healthy expansion. Cost-of-living pressures persist, interest rates are still in restrictive territory, and fears of substantial tax increases in next month’s Budget are dampening confidence. September’s composite PMI fell to a four-month low, and other business surveys point to weakening sentiment and slower activity.
That said, the overall picture may be less gloomy than the tone of recent data suggests. Both households and businesses are in unusually strong financial shape: savings remain elevated, debt levels are low, and the labour market, though softening, remains far from weak. Unemployment is still low by historical standards, and wages continue to rise faster than prices, providing ongoing support for household spending.
Implications for the outlook
We expect the economy to grow by 1.5% in 2025, slightly stronger than the current 1.2% consensus among UK forecasters. Expectations for a slowdown to just 1.1% in 2026 strike us as overly pessimistic. Further interest rate cuts from the Bank of England, which would help offset the hit from tax increases, should support activity. A gradual easing in inflation, spillovers from looser policy settings in the US and Europe, and hopefully calmer geopolitics could all help the UK economy accelerate modestly next year rather than slow.
Even so, growth is likely to remain subdued by historical standards. Fiscal risks, tight global financial conditions, and geopolitical uncertainties could easily knock activity off course. The UK economy may outperform today’s gloomy expectations, but a return to robust, broad-based expansion still looks some way off.