Reflection on November 2025 UK Economic Landscape

 

The final months of 2025 brought an unusual combination of subdued growth, shifting fiscal priorities and a complex global data environment. Reflecting on the recent economic developments reveals a picture of an economy that is neither in crisis nor in clear recovery. Instead, it appears held in a state of cautious restraint, with households, businesses and policymakers all navigating uncertainty while hoping for stability.

A Cooling Momentum in UK Growth

One of the most notable takeaways is the marked slowdown in UK GDP during the third quarter. After two surprisingly strong quarters earlier in the year, growth slipped to a marginal 0.1 per cent. What stands out is how broad-based this stagnation was. Whether looking at consumer spending, business investment, trade or output by sector, momentum was minimal almost everywhere.

Household expenditure, for example, grew by just 0.2 per cent. While slightly better than the previous quarter, it still represents a weak backdrop for an economy that depends heavily on domestic consumption. There is a clear pattern emerging: consumers are cautious, not because of immediate financial distress, but because of lingering anxiety. Uncertainties around taxes, higher mortgage costs and job market fragility are encouraging households to rebuild savings, not increase spending. It suggests a public that is preparing for the possibility of harder times, even if they haven’t arrived yet.

Services output also contributed little to growth. Hospitality, in particular, suffered with a contraction, suggesting a consumer who is willing to shop for essentials but reluctant to indulge in discretionary leisure spending. Meanwhile, construction barely moved and manufacturing took a notable hit, largely due to the temporary shutdown of a major automotive facility. These disruptions underline how sensitive some parts of UK industry remain to supply chain volatility and operational shocks.

Inflation and Monetary Policy at a Turning Point

Inflation, which had been sticky through mid-2025, finally eased in October. Moderation in services inflation and slower increases in energy prices contributed to a welcome decline. Yet the Monetary Policy Committee remains divided. Some members view the soft demand environment as a sign that inflation could fall more quickly than expected, perhaps even undershooting targets. Others worry that elevated inflation expectations among households could feed into higher wage demands next year.

The November meeting ultimately produced a narrow vote to hold Bank Rate at 4 per cent. However, given the slowdown in both growth and price pressures, markets now anticipate another 0.25 percentage point cut in December. This would mark a continued shift away from the tightening of previous years, and perhaps the first tentative move toward looser monetary conditions in 2026.

Lessons From the OBR’s Updated Forecasts

The Office for Budget Responsibility’s new assessments were a focal point of public and political interest. Prior to the Budget, speculation had been rife about the scale of the expected fiscal gap. In the end, downward revisions to productivity did indeed create a sizeable loss in future revenues, but upward adjustments to income growth softened the blow.

Growth expectations were nudged upward for 2025, reflecting the stronger-than-anticipated first half of the year. Yet the medium-term outlook remains subdued, with annual growth hovering around 1.5 per cent. Real household disposable incomes are projected to grow much more slowly than in the decade following the global financial crisis, confirming that living standards are unlikely to rebound strongly anytime soon.

Perhaps more concerning is the downward revision to business investment across every year of the forecast horizon. This reflects ongoing weakness in sentiment, squeezed margins and higher long-term borrowing costs. The UK’s chronic investment gap continues to shadow prospects for productivity improvement and long-term competitiveness.

Mixed Messages From Fiscal Policy

The Budget introduced a broad collection of revenue-raising measures, particularly concentrated toward the end of the parliamentary period. These included freezes to personal allowances, adjustments to pension tax relief and several smaller changes touching sectors from EVs to landfill to soft drinks. While individually modest, together these measures generate a substantial uplift in government revenues by 2029-30.

Alongside these came a number of high-profile spending commitments. Ending the child benefit cap, freezing rail fares, and increasing investment in infrastructure and innovation all signal a desire to soften cost-of-living pressures and stimulate strategic sectors. However, it is hard to identify a single coherent growth strategy across the package. Business groups welcomed the absence of new corporate tax rises but also highlighted the lack of direction in policies that aim to support long-term productivity.

Meanwhile, another above-inflation rise in minimum wage rates will be challenging for some firms, particularly small and medium-sized ones whose margins are already under pressure. Evidence from recent surveys shows that many businesses have absorbed rising labour and tax costs by reducing margins rather than raising prices or cutting staff. This cannot continue indefinitely, especially as cashflow conditions slip back to pre-pandemic levels.

The United States: Slow Data and a Shifting Outlook

Across the Atlantic, the US economy is grappling with delays in official data releases following the government shutdown. The Federal Reserve must make its December policy decisions with only partial information. What is known so far does not give a clear signal.

Labour markets show mixed performance. Hiring rebounded slightly in September, yet the improvement was concentrated in a few sectors, while seasonal employment in retail is expected to be notably lower than usual. Consumer sentiment indicators paint a much darker picture. The University of Michigan index has sunk to one of its lowest readings on record, reflecting household frustration with high prices and weakening incomes. Retail sales growth is declining, and inflation expectations remain elevated.

Markets currently expect another rate cut in December and further easing in 2026, but the Fed is navigating with limited visibility and competing pressures.

Final Reflections

Taken together, the narrative emerging from late 2025 is one of economies moving cautiously, almost gingerly, through an uncertain landscape. The UK faces slow growth, hesitant consumers and businesses dampening investment. Inflation has begun to retreat, but confidence remains fragile. Fiscal policy is active but sometimes feels piecemeal rather than transformative.

The US, normally a point of global stability, is also dealing with weaker sentiment and unclear data. Both economies seem to be waiting for a clearer signal, whether from a stronger labour market, firmer consumer outlook or a more convincing decline in inflation.

While there is no immediate cause for alarm, there is also limited room for complacency. The coming year will likely hinge on whether confidence can rebuild faster than new headwinds emerge. For policymakers, businesses and households alike, the challenge is balancing caution with ambition in a climate where visibility is limited and resilience remains essential.