As the UK economy approaches the Christmas season, consumer and business confidence continues to falter amid persistent inflationary pressures and fiscal uncertainties. Recent surveys indicate that half of British consumers now expect economic conditions to worsen in the coming months, reflecting growing unease about inflation, rising costs, and government fiscal policies.

The inflation rate in the UK has remained persistently high compared to other advanced economies, standing at 3.8% in August 2025, the highest among its major peers, according to official data reported recently. This elevated inflation, driven largely by rising petrol prices, hospitality costs, and notable increases in food and non-alcoholic beverage prices by 5.1% year-on-year, continues to challenge the Bank of England’s monetary policy. While core inflation and consumer services inflation have seen slight decreases, the overall price growth remains stubbornly above target. Despite a modest 25 basis points interest rate cut in August, the Bank is expected to hold the base rate at 4% for the remainder of the year, citing ongoing inflation risks and a fragile economic backdrop.

The broader economic environment adds to this cautious sentiment. UK economic growth has been weak, with just 0.2% growth over three months to July 2025, and the Bank of England has further downgraded its 2025 growth forecast to just 0.75%, halving previous expectations. The central bank’s recent decision to cut interest rates from 4.75% to 4.5% was unanimous among its Monetary Policy Committee, although it signals a cautious approach given inflation’s persistent elevation. The Bank anticipates inflation to peak around 3.7% before gradually falling toward the 2% target, a process expected to stretch into 2027. Meanwhile, labour market conditions show some easing, with wage growth slowing yet remaining elevated at 4.8% for basic pay, complicating inflation control efforts.

Consumer sentiment has seen a sharp decline, with a survey by Deloitte reporting the most significant drop in nearly three years during the second quarter of 2025. The consumer confidence index fell by 2.6 percentage points to 10.4%, its lowest level since early 2024. This drop is linked to growing concerns about job security, income growth, and mounting personal debt amid the high cost of living. The UK's unemployment rate also climbed to 4.7%, the highest since 2021. Business conditions are equally strained. Surveys conducted toward the end of 2024 showed business morale at its lowest in two years, driven by worries about the Labour government’s first budget, which included substantial increases in employer payroll taxes. These fiscal measures have been cited as dampening domestic demand and production growth, adding pressures on government borrowing costs and currency weakness.

Industries have voiced increasing concern over the budget’s impact. UK manufacturing confidence, for instance, has seen its steepest decline since the onset of the Covid-19 pandemic following the tax hikes announced in the budget. National insurance increases and an overall £25 billion tax rise have been seen as significant deterrents to business investment and hiring, leading some forecasts to revise manufacturing growth into contraction territory for 2024. This sentiment is echoed in wider business surveys that reveal companies grappling with higher operational costs and a cautious outlook on global uncertainties.

Consumer confidence surveys conducted around the budget announcement period similarly reflect heightened anxiety. Market research firm GfK recorded a dip to its lowest confidence level since March 2024, with households remaining weighed down by elevated living costs, especially in energy, whose prices surged after geopolitical shocks in recent years. Although some elements of personal finance optimism slightly improved, overall economic outlook scores continued to weaken. Businesses also reflected a decline in confidence coinciding with these fiscal adjustments.

In sum, the UK faces a challenging economic environment marked by persistent inflation, subdued growth, and dampened consumer and business sentiment. While the Bank of England navigates a delicate balance between controlling inflation and supporting growth through cautious interest rate adjustments, the government’s fiscal strategy—particularly tax increases—remains a pivotal factor influencing morale across households and industries alike. With the festive season approaching, uncertainty looms large over household spending and investment decisions, underscoring the complexity of steering the economy toward a more stable footing in the near term.

📌 Reference Map:

Source: Noah Wire Services