Economic Outlook Breakfast with HSBC Economist Liz Martins – Key Takeaways

Strong Start, Emerging Challenges and Labour Market Trends

Liz highlighted that the UK recorded the strongest GDP growth among G7 nations in the first half of 2025; a significant rebound after pandemic-induced stagnation and reduced government spending. However, sustaining this momentum is proving difficult.

Post-pandemic, employment surged in a pattern similar to the recovery following the 2008 financial crisis. Recently, this trend has slowed, and unemployment is beginning to rise. Liz identified three key factors shaping currently the labour market:

1. Correction after strong post-pandemic employment growth
2. Rising labour costs, driven by higher wages and increased taxation
3. The growing impact of AI and automation, offering cost-effective alternatives to human labour

Despite redundancies creeping up, levels remain comparable to those seen between 2014 and 2018. This slowdown is not unique to the UK however as global job creation has also decelerated, even as conditions stabilise in 2025.

Inflation and Wage Pressures

Since its introduction in 2016, the national living wage has risen by over 70%. The recent Autumn Budget includes a further 4.1% increase which is the smallest rise since 2021.

Inflation remains a challenge: October’s headline rate stood at 3.6%, with food inflation at 4.9%. While still high, forecasts suggest inflation could fall to 3% by April 2026 and potentially 2% by the end of the year.

Tax hikes, National Insurance increases, and rising utility bills have contributed to inflationary pressures, though global energy prices are now stabilising. Unfortunately, pay growth is slowing, and wage increases are often offset by inflation, leaving households under strain.

Monetary Policy and Fiscal Balancing Act

Liz explained that the Monetary Policy Committee (MPC), which sets UK interest rates eight times a year, is currently split. In its latest vote, five members favoured holding rates at 4%, while four voted for a 0.25% cut to 3.75%. A reduction is expected soon, possibly influenced by the Autumn Budget.

The Chancellor faces a delicate balancing act: satisfying bond markets, the electorate, and MPs. While the UK bond market remains stable, the risk of a fiscal “black hole” persists, which is being addressed by increased taxation. Rachel Reeves appears focused on bond market stability – a lesson learned from the September 2022 crisis under Liz Truss.

Trade and Sector Performance

The UK has maintained the lowest reciprocal baseline for tariffs, avoiding EU regulatory burdens post-Brexit. This has helped preserve competitiveness and attract international investment.

The service sector remains robust, and the UK’s appeal as an investment destination has improved compared to last year unlike the US, which has seen a decline partly due to political uncertainty.

Productivity and Industry Insights

Despite higher employment, productivity growth has lagged, partly due to reduced outsourcing. AI is seen as a potential solution to boost efficiency, though it may also increase unemployment.

The housebuilding sector is currently the most satisfied with government policy, while changes introduced last year to the non-domicile rules have had a more significant impact than anticipated.

Looking Ahead

The UK economy is growing slowly and, but not at a rate fast enough to meet our fiscal needs. Greater investment is essential and the government is having to perform a balancing act in an attempt to address a number of challenges.

Polls conducted by Liz at the breakfast session revealed the audience’s mixed views on raising the basic rate of income tax, whether the Spring Statement remains necessary, and the likelihood of an early election in 2027. However, the audience largely assessed correctly the sum the Chancellor would be seeking to raise at £30bn (whether as deficit filling or safety net depending on your views).

Post-Budget

In the end, the much-anticipated Autumn 2025 Budget proved somewhat underwhelming. Despite hopes for bold measures to reinvigorate growth and ease the burden on households, the announcements fell short of expectations. Incremental changes to tax and spending, while cautious and market-friendly, offered little in the way of transformative vision. Other changes such as the removal of the NDR discount and the increase of the minimum wage will hit businesses particularly in the hospitality, care and construction sectors -all already suffering. The continuing freeze on the tax free allowance will hit low paid workers hard although there is supposed to be some relief on that for pensioners who will all otherwise come into the tax bracket with the tax rises in April. Landlords and savers likewise will be feeling the pain come April. As the UK economy continues its slow march forward, the sense remains that more decisive action will be needed to address the underlying challenges and restore genuine momentum and positivity as well as that golden goose-productivity.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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   • Mimi Oluwande

   • Solicitor
   • Insolvency & Restructuring

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