Key Takeaways
- Many of the UK’s key economic indicators are poor.
- The economy is not in recession.
- Markets are still buoyant.
- Tariff impact yet to be properly accounted for.
Chancellor Rachel Reeves said the UK’s latest gross domestic product (GDP) figures earlier this month were “disappointing”.
The Office for National Statistics (ONS) said that there was a 0.1% contraction in economic activity in May, the second fall in as many months.
Is that news really cause for alarm? A technical recession is defined as two successive quarters of negative economic growth. If those negative monthly figures turn into negative quarterly figures, the UK will be in recession. The last time that occurred was in the final quarter of 2023.
These are not the only economic indicators concerning investors, however. Inflation remains sticky at 3.6%—way above the Bank of England’s 2% target.
Latest government borrowing figures for June also show the UK borrowed £20.7 billion last month, up from £6.6 billion in June 2024. Borrowing in the current financial year is currently estimated to be £17.2 billion more than in the 2024/2025 financial year and £11.0 billion more than the £137.3 billion forecast by the Office for Budget Responsibility (OBR) in March 2025.
This limits the “fiscal headroom” that allows the government to spend on projects designed to boost growth. Government borrowing costs remain at elevated levels: the 10-year gilt yield is 4.63%, nearly 50 basis points higher than a year ago.
Markets are looking at the next “fiscal event”, the Autumn Budget, to see if the chancellor has to raise taxes, cut spending or increase borrowing—or a combination of these levers.
What Are the Key UK Economic Indicators?
Economists use a long list of indicators to assess the health of the UK economy. There are varying time delays in the public seeing this data: for example, the latest unemployment figures run up to May, but we already have the June inflation data.
Some indicators are described “lagging” or backward-looking like inflation and the unemployment rate. These are limited in their ability to show what may happen next.
Others are “leading” or forward-looking, like consumer confidence indexes, new unemployment claims and stock market prices. Meanwhile, GDP data is considered a “coincident” indicator in that it reflects the current state of the economy.
Here are some key indicators economists use.
GDP: Two successive quarters of negative economic growth are considered a recession. Long-term economic growth rates have weakened over time in the UK, spurred by shocks like the global financial crisis, Brexit and the covid pandemic.
Consumer spending/Retail sales: Shoppers tend to tighten their belts in response to economic uncertainty, which can lead to lower economic output. Monetary policy works on the idea that raising rates—and therefore making debt more expensive—is one way of “cooling” consumer activity in the real economy, thus slowing price rises. This keeps a lid on inflation but makes borrowing more expensive, so can hamper economic growth in a credit-driven economy like in the UK.
Employment: Recessions tend to stifle wage increases and promotions, and slow down job mobility. But economic uncertainty can trigger redundancy programs by employers anyway, even ahead of an actual recession. Rising unemployment or declining job growth indicates problems in the economy. Often companies then begin hiring again when the economy picks up.
Inflation: Prices tend to rise during periods of economic growth, and the opposite is usually true during contractionary periods.
But persistent high inflation without corresponding economic growth may cause consumers to cut back on spending. If this situation persists it can turn into “stagflation”. For example, the UK has faced higher energy and food costs since 2022 in a subdued period of the UK economy.
Interest rates: Higher inflation typically means the Bank of England will raise rates to contain the speed of price increases. Likewise, it may lower rates to encourage spending and borrowing, at the risk of more inflation.
Stock market performance: The stock market and the economy don’t always move in tandem. Economic uncertainty or external shocks like tariffs can certainly prompt market selloffs, however. The prices of stocks deemed vulnerable to falling consumer spending can likewise fall, while more recession-proof or defensive stocks tend to prosper.
UK GDP Looks Weak, But Recession Isn’t Here Yet
GDP measures the economic output of a country during a specific period— and is reported usually monthly, quarterly, and annually. For example, the UK has only recently started reporting monthly GDP figures, while the markets still focus on quarterly data.
In the UK, economists and commentators have long cited relatively low GDP growth as evidence of the economy failing to fire on all cylinders.
Recently that malaise has prompted a host of regulatory, pension and ISA reforms to drive investment and activity in the economy. While the UK’s GDP figures have been disappointing, a recession still looks distant.
“GDP growth was positive to the tune of 0.7% in the first quarter, and expectations for the second quarter point to a number anywhere between zero and half a percent.”
It’s still not clear what is the precise effect of the US tariffs on the UK economy. The UK has a preferential trade deal with the US, but the longer-term effects are yet to be seen.
UK Consumer Spending is Slowing
Economists look at consumer spending as a measure of economic activity in the UK, especially given the economy’s dependence on services. Hotels, holidays, bars, restaurants and even concerts generate billions, but these are cyclical sectors that depend on a “feelgood factor”. Rising house prices, cheap credit, or strong pay growth can bolster this.
In June 2025, UK consumer spending slowed when compared with the previous month.
In addition, the ONS says that, in June, transport indicators showed reduced activity, with the number of UK flights and the number of ship visits to major UK ports falling by 1%, compared to May.
“Manufacturing and construction activity have been on the decline for at least the last six months, but services activity, which constitutes a far larger share of employment, has seen growth for all but one of the last 12 months,” says Field.
UK Jobs Market Shows Signs of Weakening as Taxes Rise
Several measures show what is going on in the UK labor market, including pay growth, unemployment numbers and rates, and companies announcing restructuring or redundancies. A key context is a government increase to employer National Insurance contributions in April 2025, which some businesses are struggling to afford. They have cut back hiring as a result. Some are laying off workers.
According to the ONS, the number of total employees in the UK fell by 0.4% between May 2024 and May 2025—meaning 135,000 fewer people in work. In the period March to May 2025, payrolled employees fell by 81,000, a 0.3% dip. The early estimate for payrolled employees in June 2025 shows a decrease of 178,000, or 0.6% on the year, and by 41,000 on the month, to 30.3 million.
In the period March to May 2025, the unemployment rate for people aged 16 and over was 4.7%. “This is above estimates of a year ago, and up in the latest quarter,” the ONS said. The UK claimant count, which tracks the number of workers claiming unemployment benefits, increased on the month and the year to 1.743 million in June 2025. The number of potential redundancies increased by 17% compared with the previous month.
More than 13% of young men are considered NEETs, by the ONS, which people between the ages of 16 and 24 not in education, employment or training in the UK.
The number of employers proposing redundancies increased by 2%. This is determined using data from the UK Insolvency Service.
UK Inflation is Sticky, But Should Still Fall
Rising fuel and fuel costs have been driving UK inflation higher in recent months. In its latest data (for June) released earlier this month, the ONS said the Consumer Prices Index accelerated by 3.6% in the 12 months to June 2025, from 3.4% in the same period for May. It had been expected to remain at 3.4%.
This creates something of a problem for Bank of England, which has been battling inflation and falling economic growth amid US tariffs. For its part, the Bank of England has said it expects inflation to rise to 3.75% through 2025 before falling to 2.4% in Q2 2026, and 1.9% in Q2 2027. Recall that CPI was rising by more than 10% in 2022 before falling back to 2%.
Recent inflation numbers have been of some concern, running far in excess of the Bank of England’s targeted rate.
However, this is expected to fall back materially in the coming months, easing pressure on the Bank of England, and hopefully allowing them to cut interest rates materially, which should buoy the economy.
Michael Field, chief European market strategist
We will find out whether the Bank of England has revised that expectation when it issues its next decision on rates alongside its quarterly monetary policy report in August 2025.
Investors Still Expect a Bank of England Interest Rate Cut in August
Cutting, holding, or increasing interest rates allows central banks to influence the flow of money into the real economy. Investors still expect a rate cut when the Bank of England’s Monetary Policy Committee, or MPC, meets next month.
Homeowners and housebuilders are all waiting for rates to fall so mortgages become cheaper and house buying becomes easier. But the era of ultra-low interest rates is gone for good. While the Bank of England is not at the end of its rate-cutting cycle, market prices suggest, the neutral or “terminal” rate is expected to be around 3%. This is far higher than interest rates in recent years: rates hit a record low of 0.1% just after the pandemic.
That comes as the average UK house price shows the most significant fall in more than two decades, following on from changes to stamp duty in April, where a temporary discount ended. According to property website Rightmove, the average price of a home for sale in July fell by £4,531, or 1.2%, when compared to June. The average price of a house in the UK is now £373,709. The company also said the number of properties for sale is at a decade high. This indicates demand has weakened and the UK housing market has slowed.
But the UK Stock Market is at a Record High Again
The stock market cannot always be used as a bellwether for the economy, but its performance does tell onlookers a lot about economic confidence. The UK FTSE 100 index is at all-time highs. Having initially repeatedly flirted with the 9,000 points mark, it closed above that level on July 21 and on subsequent days.
This might seem incongruous given falling GDP, but several factors explain it.
“Less than 20% of revenues of these companies originate in the UK, so in effect these companies are feeding off European and global optimism,” Morningstar’s Field says. “The FTSE 250 is probably a better proxy, which is trading at three-year highs, but still below 2021 levels.
“Despite all the overhangs with tariffs, a slowdown in growth for the Magnificent Seven, and generally anaemic growth, US and European indices are also trading at all-time highs. This is slightly less of a concern in Europe, where we still see marginal upside. But in the US, markets are swiftly moving into overvalued territory.”
Unlike much economic data, stock markets are considered leading indicators in that equity prices reflect expectations about future growth, both at a corporate level and in the wider economy.
James Gard contributed to this article.
