From the Desk of the Chief Economist May 2025

Navigating noise

The Bank of England has been affected by this too. Their forecast published on the 8th including analysis of the impact of US tariffs on the UK economy conditioned on their then level. By the 12th, it was out-of-date following talks between the US and China which have seen both countries reduce their tariffs significantly.

In the UK, the impact of this noise has been causing companies to hit pause on decisions where they can, which is typically what one sees during periods of heightened uncertainty when the option value of waiting rises. And it seems to be affecting consumers too. Survey data from NMG/Bank of England finds that for those consumers who are saving “more than usual”, there’s been a small rise in the proportion who are rebuilding savings in case of emergencies to around a third. Analysis by the European Commission in November 2024 finds that an average sized shock (looking at the period 1995-2024) reduces GDP growth by around 0.5% points per year, with the effect greater for investment than for consumption.i There’s helpful advice out there for making decisions under uncertainty, and I like thinking about the question “Is this the weather or the climate?”: a useful way of thinking about how to adjust to a permanent change in the level of uncertainty.

Bank of England MPC splits on outlook for inflation

Adding to the complexity of the current economic landscape was the surprise 5-4 split vote within the MPC to reduce interest rates by 25 basis points. A further two members were sufficiently concerned about weak demand and global trade policy reinforcing other disinflationary pressures that they preferred a larger 50 basis point cut. But unexpectedly, two members of the MPC – the Chief Economist Huw Pill (formerly of Goldman Sachs) and American economist Catherine L Mann – both voted for rates to stay on hold. Their view was influenced by rising inflation expectations amongst both households and businesses who have become sensitised to changes in inflation in recent years. And with the inflation rise expected to move to 3.4% in April’s data, these MPC members are worried that this will feed through to wage demands and price setting. The message is that despite the negative economic shock to the economy from trade policy uncertainty, a faster pace of interest rate cuts to help bolster confidence is not a shew-in. But rates will still be coming down this year, which take some pressure off. Overall, growth is expected to be around 1% this year and next year – not dissimilar to 2024’s 1.1% growth.

Government policy “Springs” into action

With apologies for the feeble pun, we’re due a bumper set of announcements from the UK government in the coming weeks. And we’ve just had the Immigration White Paper, which places higher restrictions on inward migration to the UK by, for example, increasing the threshold for skilled worker visas to graduate level, narrowing the list of critical shortage occupations on the Temporary Shortage List and closing the social care visa route to overseas recruitment. Those migration policies have the potential to be negative for growth, but that impact is affected by the government’s other policies affecting the labour market, including welfare reform and Employment Rights. The second phase of the Spending Review is then scheduled for publication on the 11th June, which will set departmental budgets for 2026-27 and 2027-28. And it’s expected to be accompanied by the Industrial Strategy, Trade Strategy, and the 10 year infrastructure plan. A Small Business Strategy is due as well, though the timing is a little fuzzy. These should all give businesses a better sense of the government’s plan for supporting priority sectors and departments “some” confidence regarding their longer term budgets. On balance, the policy announcements made by the government since the Autumn are assessed by the OBR to be positive for growth over time, with the hit to business counterbalanced by higher public sector spending and payoffs from planning reform. But judgement has yet to be passed on the Employment Rights Bill and the Immigration White Paper in particular, and the labour market is softening rapidly following the rise in NICs and the minimum wage.