Economic Overview
What a difference a tariff makes! I ended my commentary last quarter by referencing the Sisyphean struggle that 2025 would likely present our industry.
However, the first 100 days of the new US administration have been far more disruptive (and consequential) than anticipated, with President Trump's apparently Zeus-like ambition now reshaping global trade. The post-war monetary consensus now feels fundamentally altered; established relationships and certainties are being rapidly redrawn, creating both challenges and opportunities in the years ahead.
Against this backdrop the UK macroeconomic outlook for 2025 remains uncertain. The most recent ONS figures showed GDP beating expectations and growing by 0.7% in the Quarter to March 2025 driven by a rebound in production, steady services output and household consumption.
However, full-year GDP growth is projected at around 0.9%, mirroring the weak expansion seen in 2024 and reflecting the impact of April's tax hikes, supply chain disruptions, and heightened geopolitical trade tensions. And so, it may be premature to get too optimistic.
The challenging economic environment is further complicated by the ongoing introduction (and then pausing and reduction) of sweeping US tariffs, which represent a significant shift in global economic priorities. The current US approach appears to be part of a larger economic reset, deeply intertwined with geopolitical considerations, structural reforms and national security concerns. The primary goal appears to be reshoring manufacturing to America, reducing dependence on global supply chains—particularly those involving China—and creating negotiating leverage with other countries. While tariffs are applied universally, the main target is clearly China's role in global supply chains and the restoration of Trump's interpretation of a 'level playing field' in global trade.
For the UK, these tariffs create additional uncertainty (as well as possible opportunities as per the new UK–USA trade treaty), at a time when the domestic economy is already facing significant challenges.
- Labour market conditions are cooling, with the unemployment rate holding at 4.4% in the three months to February 2025 but forecast to rise to 4.6% by year-end.
- Job vacancies have now fallen below pre-pandemic levels for the first time since 2021, reflecting weaker hiring intentions as businesses respond to increased employer NICs and minimum wage costs.
- Despite this, nominal regular earnings grew by 5.9% year-on-year, with real wage growth at 2.1%.
- Pay growth is expected to moderate as firms adjust to higher labour costs, with the public sector seeing a 5.7% increase and the private sector at 5.9%.
- Inflationary pressures have temporarily eased, with CPI inflation at 2.6% in March, but are expected to rise again, peaking at 3.5% in the autumn due to higher energy bills, regulated price increases, and the pass-through of labour cost rises.
- Public finances remain under pressure, with government borrowing for the last financial year reaching £151.9bn, exceeding forecasts.
- The tax burden is set to rise further, with tax as a share of GDP projected at 37.7% by 2028/29, the highest since 1948.
- The debt-to-GDP ratio remains elevated at 95.8%.
- now facing the MPC reflected in their voting record.
- The 10-year gilt yield stood at 4.46% at the end of April, reflecting ongoing market uncertainty and elevated public borrowing costs.
"For the UK, these tariffs create additional uncertainty (as well as possible opportunities as per the new UK–USA trade treaty), at a time when the domestic economy is already facing significant challenges."
Having already cut rates in May (albeit via a rare three-way split decision), the Bank of England is expected to deliver two further 25 basis point cuts in 2025. But monetary policy remains finely balanced as rate setters weigh persistent inflation against increasingly fragile growth and the potential for imported inflation via currency fluctuations and a more restrictive global trade environment - the sheer complexity of the short & long-term pictures being reflected in the MPC voting patterns.
Meanwhile, the impact of the Government's recent Budgets is now being felt more acutely in the labour market. Figures released by the ONS in early May showing the UK's unemployment rate rising to 4.5 per cent, the number on company payrolls falling by 63,000 over the past 12 months, and 131,000 fewer job vacancies than at this time last year.
Notably, this data only covers the period up to March—before the rise in the minimum wage and the Chancellor's £25 billion national insurance hike took effect. The fact that the labour market was already faltering before this ‘cliff’ is telling, with businesses clearly bracing for impact.
While the Bank of England maintains that the effect of tax hikes on employment 'appears to be fairly small', a range of unofficial business surveys point to a more pronounced weakening: demand for jobs is definitely falling, the BDO employment index has hit a 12-year low, and the number of employers expecting to increase their workforce in the next three months is at a record low outside the pandemic. Some economists now expect the unemployment rate to reach 5 per cent by year-end.
The Chancellor and BoE therefore face a difficult backdrop against which to form policy for the year ahead; although there is some hope that the first reading of Q1 GDP growth—expected to show the best quarter in a year—could prompt upwards revisions to the outlook for 2025.
Warren Buffett once said: "Uncertainty actually is the friend of the buyer of long-term values" – a quote worth remembering. While we began the year pushing our Sisyphean boulder uphill, the broader landscape has transformed dramatically in a short space of time. In an environment where America appears to be redrawing the economic map and the UK economy navigates between inflation concerns and growth potential, real estate continues to represent an unrivalled hedge against these unprecedented winds of change.
The very volatility that creates short-term anxiety often reveals the most compelling long-term opportunities for those with the perspective, and confidence, to recognise them.