UK economy weekly round up

The UK economy expanded by just 0.1% in Q3 2025, down from 0.3% in the previous quarter. This slowdown aligns with the OECD's warning that fiscal consolidation measures will act as 'headwinds' to growth. For investors, slower GDP growth suggests reduced corporate earnings potential across consumer-facing sectors, though the Bank of England notes the banking system remains robust enough to support lending during mild downturns.

Service sector growth slowed in November amid declining new orders, according to S&P's purchasing managers' index. As services represent 80% of UK GDP, this softness matters significantly for investors. The slowdown reflects both pre-Budget uncertainty and persistent inflation pressures, potentially delaying business investment decisions that drive long-term productivity.

The Autumn Budget introduced several structural changes: freezing income tax thresholds until 2031 (pulling more workers into higher tax brackets), adding a £2,500 annual council tax surcharge for homes over £2 million, and freezing prescription charges and rail fares. These measures aim to balance fiscal responsibility with cost-of-living support, but the OECD cautions they'll weigh on household disposable income – a key driver of UK economic activity.

The Bank of England's December Financial Stability Report confirms the UK banking system remains resilient, with the 2025 stress test showing banks can withstand severe global shocks. Mortgage lending grew 3.2% year-on-year – above the post-financial crisis average – as competitive pricing and eased regulatory rules boosted activity. This stability should prevent credit crunches, but investors should note that renters (who face higher vulnerability during economic shocks) represent 20% of households.

While no immediate rate changes are expected, the Bank highlighted easing mortgage rates following monetary policy adjustments. For savers, this means continued pressure on easy-access savings rates, while fixed-rate mortgage holders may see opportunities to refinance. The Bank's neutral stance on the countercyclical capital buffer (maintained at 2%) signals confidence in current lending conditions but leaves room for rapid response if economic data deteriorates.

Household energy bills will decrease by approximately £150 annually through government funding of renewable energy obligations. This provides tangible relief for investors concerned about cost-of-living pressures eroding consumer spending. However, the OECD's warning that UK inflation will remain the highest in the G7 suggests energy price stability may be temporary if global commodity markets tighten. UK-listed energy companies may see margin pressure if wholesale prices rise faster than regulated retail tariffs.

A YouGov poll reveals significant public skepticism about the Autumn Budget's impact: 52% believe it will worsen the country's economic situation, while 50% expect personal financial harm. This sentiment matters for investors as consumer confidence directly influences retail spending – a key economic driver. Interestingly, only 8% think the Budget will benefit the country overall, highlighting potential headwinds for consumer-facing stocks.

The Bank of England notes 'renters remain under pressure' despite overall household debt being low by historical standards. This segment's vulnerability could accelerate if unemployment rises, potentially increasing arrears in the private rental sector. For investors, this underscores the importance of analyzing consumer credit exposure in banking portfolios and the resilience of affordable housing providers.

The OECD's projection of the UK having the highest inflation in the G7 reflects unique domestic challenges beyond global trends. While energy prices have stabilized post-Ukraine invasion, the UK's productivity 'drag' – noted in both OECD and Bank of England reports – makes it more vulnerable to imported inflation than peers. For investors, this means UK assets may underperform during global risk-off events, but could outperform if domestic reforms gain traction.

Investors should monitor Q4 growth indicators and public reaction to newly implemented Budget measures. Key risks include potential downward revisions to growth forecasts if consumer spending weakens further, and political volatility as Reform UK gains traction in polls. The Mansion House Compact's progress on private market investments (now 0.6% of pension assets) offers a silver lining for growth-oriented investors seeking UK productivity improvements.

Practical takeaway: Balance defensive positions (utilities, consumer staples) with selective exposure to UK productivity plays. While near-term headwinds exist, the banking system's resilience and gradual mortgage market normalization provide foundations for recovery. Remember that tax threshold freezes will increasingly impact middle-income earners – a demographic crucial for consumer-driven sectors.