Client Update - 7th February 2025

I appreciate that by the time you read this President Trump has probably staked claim to another piece of global real estate to go with Greenland, Panama, The Gaza Strip etc, but I feel I have written enough of Trump last week, so this week we will focus on matters closer to home. Unfortunately.

Yesterday, the Bank of England (BoE) gave a grim summary of how they see the economic fortunes of the UK, whilst cutting interest rates by 0.25%. Andrew Bailey voiced concerns over the government’s efforts to lift growth, as the central bank forecast weaker activity, higher inflation, rising unemployment and a sharp deterioration in Britain’s output potential. The BoE’s Monetary Policy Committee interest rate cut meant that UK rates are now at 4.5 per cent against a backdrop of stagnant output and rising trade tensions, with two rate-setters favouring an even bigger cut by 0.5% to guard against the risks of a sharper downturn.

The weak outlook underlines the challenge facing chancellor Rachel Reeves after she pledged that growth was the government’s number one mission. It raised fresh questions about the fiscal outlook, analysts said, given the importance of stronger growth to bolster tax revenue. If the Office for Budget Responsibility, the government’s fiscal watchdog, were to issue a similarly downbeat growth outlook, it would increase the risk that the chancellor would break her self-imposed fiscal rules. Weaker growth prospects could mean the government come back for further tax rises, or are forced to cut expenditure.

In another blow to the government’s attempts to send an upbeat message on the economy, the BoE’s short-term forecasts point to an acceleration of inflation to 3.7 per cent by the middle of 2025 — far above the BoE’s 2 per cent target. Even if interest rates remain higher than recent market expectations — with only two more quarter-point cuts by the end of 2027 — the forecasts show inflation would only return to the BoE’s 2 per cent target in late 2027.

Meanwhile, GDP would grow just 0.75 per cent this year, before picking up in 2026 and 2027, and unemployment would rise to 4.75 per cent. Mr Bailey, BoE governor, sought to put a positive spin on the inflation forecast, saying the near-term jump was chiefly due to “temporary factors” that were “not directly linked to underlying cost and price pressures in the UK economy.” A 20 per cent rise in wholesale gas prices across Europe was the biggest driver, he said, along with planned increases in regulated bus fares and household water bills. But Bailey also acknowledged there was “heightened uncertainty” that could push inflation in either direction.

The biggest worry is that the BoE has become more pessimistic about the rate at which the UK economy can grow without pushing up inflation. Slightly worryingly, Mr Bailey said the “challenges reading some of the data” had made it especially difficult for the policy committee to judge what was going on. Recent data revisions showed the UK population and workforce had grown faster than previously thought, he noted — and since “we haven’t had a change in GDP, we can only conclude mathematically that productivity has got much worse.” Growth in employment has been fastest in parts of the public sector such as education and health, whose contribution to GDP is notoriously hard to measure.

Right, I need to cheer up and remind myself that it is often when things seem the bleakest, that real green shoots of optimism are found. The UK stock market is certainly doing its best to cheer us up, and with a further rate cut UK Gilts are starting to recover lost ground. I will endeavour to find better news next week, when I write from the new United States colony of West Somerset! Do have a good weekend.