By The UK economy has faced its share of ups and downs recently, with changes in unemployment, wage growth, and business sentiment shaping the outlook.
Yet, despite signs of a cooling labour market and persistent challenges from rising business costs, there are indications that parts of the UK economy remain resilient.
While uncertainties from political developments and budgetary changes continue, recent data offers a mixed but insightful view into the state of the economy.
The good and the bad: wage growth and unemployment
The UK’s unemployment rate rose to 4.3% for the three months ending in September, up from 4.0% in the previous quarter, according to the Office for National Statistics (ONS).
While this uptick might initially raise concerns, it’s worth noting that wage growth has continued to outpace inflation, providing a degree of financial stability for many households.
Excluding bonuses, wages grew by an annual rate of 4.8%, which, after adjusting for inflation, means real wage growth of approximately 2.7%.
This increase in real wages is significant, as inflation has slowed to 1.7% — its lowest level in years.
As a result, British consumers are experiencing higher purchasing power, a welcome change after years of price surges that had eroded household incomes.
For many, this boost in purchasing power has been a relief, yet it does not paint the full picture of the current economic environment.
What are the main concerns for the UK right now?
The government’s latest budget introduced higher employer National Insurance contributions (NICs) and a rise in the National Living Wage, set to take effect next April.
While these measures are designed to support public services and improve living standards, they have placed a considerable financial burden on businesses, especially in the retail sector.
According to BBC, major retailers, including Asda and Sainsbury’s, have raised concerns over the rising costs.
Asda has projected an added cost of £100 million due to the increased NICs and minimum wage requirements, while Sainsbury’s estimates its costs will increase by around £140 million.
This anticipated rise in expenses has led some companies to reassess their hiring plans, potentially slowing down recruitment as they look to offset these costs.
Vacancy levels have been falling for over two years, and in the recent quarter alone, job openings decreased further to their lowest level since May 2021.
The ongoing decline in vacancies, paired with slightly higher unemployment, makes business more reluctant to hire.
According to the British Chambers of Commerce, many firms are delaying hiring, increasing prices, or cutting costs in response to the added financial strain.
For employers, especially in sectors already operating on thin margins, the ability to absorb these costs is limited.
The Bank of England’s perspective
Recently, the Bank of England reduced interest rates for the second time this year, as inflation has moved closer to the bank’s 2% target.
However, some analysts note that wage growth — though gradually slowing — remains elevated and may keep inflationary pressures in play.
This situation makes the BoE’s task even harder.
The continued strength in wage growth, even as other parts of the labor market show signs of slowing, indicates that the central bank might face challenges if inflation begins to edge up once more.
Many economists are watching for signs that the current wage and unemployment trends will lead to a more significant change in interest rate policy.
Hopeful consumers?
One aspect of the UK economy that may not be immediately apparent from the data is consumer sentiment.
UK consumers, despite having relatively healthy household finances, have been more cautious with their spending compared to their US counterparts.
Analysts suggest that worries about job security, taxes, and the impact of recent budget changes may be making consumers hesitant.
The caution in spending reflects broader concerns over the future economic situation of the country, as consumers are wary of job stability and the possibility of rising taxes.
Analysts believe that an improvement in consumer confidence could be a key factor in supporting economic growth moving forward, as consumer spending plays a central role in the UK economy.
How is the rest of the world feeling about the UK?
The international environment is also playing a role in shaping the UK’s economic outlook.
With ongoing trade negotiations, including the risk of tariffs under different global trade policies, some UK businesses have faced additional uncertainties.
However, economists note that the UK’s exposure to US trade risks is lower than many other major economies, suggesting that shifts in US economic policy might not heavily impact the UK.
Investor sentiment toward UK markets has been mixed, with some capital outflows in response to recent economic uncertainty.
Yet, undervalued UK stocks are starting to attract attention.
Even with recent outflows, the low valuations of many UK companies could attract investors looking for affordable opportunities.
This trend has already resulted in foreign acquisitions of UK firms, such as the recent purchase of UK-listed Aquis Exchange by Swiss firm SIX Group at a 120% premium.
For long-term investors, these discounted valuations might present an opportunity, either through potential price appreciation or acquisitions.
The UK market’s affordability is becoming a notable draw, especially for private equity and foreign investors seeking value.
A glass half-full perspective
In many ways, the UK economy is showing resilience despite the pressures it faces.
Wage growth, while cooling, still exceeds inflation, giving households a boost in purchasing power.
However, rising business costs and cautious hiring plans indicate that challenges remain.
The labor market, while showing some signs of strain, still offers enough stability to keep unemployment relatively low by historical standards.
The question for policymakers and businesses is how best to tackle these mixed signals.
Ultimately, whether the UK economy strengthens or falters may hinge on consumer and investor confidence.
For consumers, the recent boost in real wages could provide a foundation for increased spending if job security fears subside.
For investors, the UK’s market valuations offer potential rewards, especially as international buyers take note of UK assets.
The UK economy’s prospects may not be entirely clear, but there are signals of resilience that could support a more optimistic outlook, especially if consumer sentiment and investor confidence improve.
The post Is the UK economy stronger than we think? appeared first on Invezz
