Five things you need to know about macro

1. The economy (just about) remained in positive territory at the end of 2024, with the public sector doing the heavy lifting

The UK economy grew by just 0.1% in Q4 last year, following flat growth in Q3 and driven in part by the public sector. This leaves annual growth at 0.9%, with survey indicators suggesting growth will remain soft in early 2025.

Underneath weak headline growth, there are major sectoral differences since 2019; with manufacturing and consumer-facing services struggling, while business-facing services (and the public sector) have fared better.

Business impact: Macro factors are driving sector performance. The cost of living and energy prices have hit consumer services and manufacturing, while demand for professional services and tech has followed global trends.

2…the labour market continues to cool, although real wages are growing, and unemployment remains relatively low

Unemployment has edged up slightly and vacancies have fallen back, with the ratio between the two now above pre-pandemic levels. Exceptions include the construction industry and the public sector, where vacancies remain elevated.

Wage growth remains strong, with the rate up again in December. It continues to outpace inflation, supporting real incomes, but the increase to Employers’ National Insurance contributions could see lower employment and wages.

Business impact: Continued real wage growth should help boost demand for consumer businesses, as household incomes rise. Employers are seeing fewer job postings go unfilled, though tax rises could see hiring intentions fall.

3. Inflation is set to rise this year, although the Bank of England are expected to continue cutting rates

Inflation is forecast to pick up slightly this year, mostly driven by energy and utility prices. Inflation in January was 3.0%, slightly above the Bank’s forecast, but underlying measures of core inflation were more in line with their expectations.

The Bank of England have so far indicated they intend to look through the expected uptick in inflation set out in their forecast, with the Monetary Policy Committee shifting on balance to a more dovish stance in February.

Business impact: A rise in inflation may slightly weaken sentiment and consumer spending power, but it’s unlikely to deter further Bank of England interest rate cuts, supporting investment and consumer demand.

4. The Government’s fiscal position remains challenging, despite getting a slight reprieve from the bond market?

By mid-January, the jump in gilt yields was assumed to have all but wiped out the Government’s ￡9.9bn headroom to meeting its current budget fiscal rule. Around a third of this has since unwound, but yields remain up on the autumn.

While falls in yields will help, the growth outlook has also weakened. The OBR is likely to revise down forecasts for GDP and therefore taxes. This could see the Chancellor having to resort to spending cuts or further tax rises.

Business Impact: Having shocked businesses in the autumn, the Chancellor will likely look elsewhere for extra revenues. Capital gains tax could be back on the table, and income tax threshold freezes could be extended beyond 2028-29.

5. US tariff policy remains a risk to global growth, although the UK may be less impacted than other nations

EY modelling points to a reduction in global growth from US tariffs, with the UK less impacted partly due to a higher share of services trade. Some sectors, such as pharmaceuticals and automotive, are however more exposed.

The threat of broad US tariffs risks slower global growth and higher inflation. This has driven expectations of higher interest rates, has seen the dollar strengthen and caused volatility in equities.

Business impact: UK businesses that either sell into, or source from, North America could face higher costs or disruptions to supply chains. Businesses with operations in the region will have to plan under this uncertainty.