News in Charts: The UK outlook

UK GDP growth figures for 2025 Q1 surprised on the upside. However, this inflated figure hinged on accelerated net-exports ahead of expected US tariffs, along with apparent higher business investment, which is not in keeping with measures of deteriorating economic sentiment in the UK. As a result, in the near-term, Fathom and indeed most economists dismiss this surprise as a one-off and not as a sign of things to come.

The underlying problem for the UK and the incumbent Labour party remains the same as it has been for the past few years, a lack of GDP growth since the pandemic. The reasons behind the lack of growth are not new either, a lack of investment in the UK, both by businesses and government, with the chart below showing that, among its G7 counterparts, UK investment has been towards the bottom end of the scale over the past several years.

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With this in mind, when the newly elected Labour government announced that they would prioritise investment, by adjusting borrowing rules such that borrowing for investment would be allowed, Fathom was optimistic that this would have a positive impact on the UK’s growth trajectory. Specifically, the change in these rules facilitated an increase in capital expenditure, which academics tend to regard as the most stimulative form of fiscal easing.

However, the amount of public sector borrowing in the UK has been higher than expected over the past several months. In fact, the cumulative surprise over the past 12 months of £20 billion exceeds the Office for Budget Responsibility’s (OBR) £10 billion estimate of fiscal headroom that the Labour party has to work with. If these upside surprises continue, the fiscal headroom available to the government will quickly disappear. The fact that there have been systematic forecast errors over the past few years, averaging £11 billion over the last three years, gives reason to believe that these upside surprises may continue.

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The Labour Party did have some idea about the dismal state of public finances as early as September 2024, when they discussed the £22 billion ‘black hole’ in public finances. This statement hinted strongly at impending tax increases, which marked the start of deteriorating economic sentiment in the UK. The tax increases came in the October Budget, primarily in the form of increased employer national insurance contributions (NICs) due to take effect from April 2025. The change in employer NICs was an attempt not to tax employees directly, as the party had promised in its election campaign, but it has instead had the effect of reducing employment as firms look to protect themselves from the increased tax burden and increasing precautionary savings among UK households.

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Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.

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All of this has led to falling economic sentiment in the UK in the past few months, as shown in the chart below. This has undermined the Labour party’s attempt to boost economic activity in the UK, while public support has deteriorated, making it difficult for them to make any further difficult decisions that may increase the amount of fiscal headroom they can operate with.

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There are several clouds over the UK’s macroeconomic outlook over the coming year, how the incumbent government navigates it in the context of waning political support will be one to keep a close eye on.

The views expressed in this article are the views of the author, not necessarily those of LSEG.