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10 June 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Labour market data suggests disinflation is on track

  • Although April saw the National Living Wage rise, another fall in pay growth and a continued loosening in labour market conditions will give the Bank of England slightly more confidence that domestic disinflation is here to stay.
  • However, earnings growth is still too high for comfort and the Monetary Policy Committee (MPC) is committed to ensuring that sticky inflation does not become a permanent feature of the UK economy. We continue to expect interest rates will be lowered gradually over the course of the year.  

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Pay growth fell across the three months to April, even though the National Living Wage rose by 6.7% during that month. Headline (three-month average of the annual rate) pay growth slowed to 5.2%, down from 5.5% in March. Although pay growth is still high, some of the momentum in wage gains has eased in the first few months of 2025, and earnings growth will likely slowly return to more normal levels over the next 12 months. 

“The labour market continues to weaken, reflecting a sustained period of modest activity growth, combined with April's rises in the National Living Wage and employers' National Insurance Contributions (NICs). The unemployment rate increased to 4.6% in April, although ongoing data concerns mean the Labour Force Survey (LFS) insights should be taken with a pinch of salt. However, the picture was mirrored in the payroll data, which reported that employment fell by 109,000 in May. The change in businesses' operating conditions and ongoing economic uncertainty also softened hiring intentions, with job openings slipping further below their 2019 level. 

“The last Bank of England meeting saw the MPC deeply divided. The message since has been widespread agreement amongst rate-setters that disinflation is on track, with the disagreement more on the pace at which rates can safely be cut. Today's data is likely to reinforce the view that underlying inflationary pressures are cooling. But with pay growth still far above the rate consistent with inflation returning sustainably to 2%, most of the MPC will still want to act cautiously to guard against sticky inflation. A cut at the MPC’s meeting next week appears unlikely, and we expect the next reduction in Bank Rate to come at the August meeting.”

23 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Retail sales rose again in April

  • April delivered a fourth successive rise in UK retail sales following a significant uptick in food sales. However, it’s unclear as to whether underlying conditions are as strong as this data suggests, with sales likely to fall back in the coming months.
  • The outlook for retail sales further ahead is dependent on the mood of consumers. Weaker real income growth, tighter fiscal policy, and the lagged effects of past interest rate rises represent powerful headwinds to spending. But if consumer confidence remains resilient, there is scope for spending growth to align more closely with household income growth.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Following strong gains in the first three months of the year, retail sales volumes climbed a further 1.2% month-on-month in April. Last month's increase in sales was much larger than expected and was primarily driven by a rebound in food store spending. The Office for National Statistics (ONS) attributed this to better weather in April. Elsewhere, non-store and fuel sales rose fractionally. This was more than enough to offset a relatively modest decline in sales at non-food stores, as the sector's recent strength continued to unwind.

“The retail sales data has been exceptionally strong in recent months, but it’s unclear as to whether underlying conditions are quite as robust as the data suggests. Furthermore, there was a puzzling inconsistency in official data for Q1, with both retail sales and output of non-retail consumer-facing sectors growing strongly despite a very soft outturn for consumer spending. The ONS' difficulty in adjusting for changes in seasonal spending patterns since the pandemic is probably part of the story.

“Looking ahead, we expect to see some payback for the string of recent upside surprises, with sales set to fall back in the coming months. Beyond that, the consumer outlook is mixed. Softer real earnings growth, tighter fiscal policy, and the lagged effects of past interest rate rises on mortgagors are likely to mean that real household income growth cools from the strong pace seen over the past year. But provided recent US tariff announcements don’t cause a sustained impact on consumer confidence, and this morning's GfK survey provides reason for optimism on that score, we expect consumer spending growth to become more closely aligned with household income growth.”

22 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

PMI rebounds in May, but likely remains too downbeat

  • The flash S&P Global survey reported a more modest contraction in private sector activity in May. Since the start of the year, official GDP growth estimates have outperformed the survey's readings by a considerable margin. We expect this will be the case once again in Q2.
  • The survey's costs and prices balances both cooled in May. We expect the majority on the Monetary Policy Committee (MPC) to continue to back the well-established 'cut-hold’ tempo of rate cuts in the coming months.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “May's flash S&P Global survey saw the composite Purchasing Managers’ Index (PMI) rebound following a particularly significant fall in April. But with May's index only increasing to 49.4, from 48.5 a month earlier, the survey continued to signal a modest contraction in private sector activity. Fortunes diverged at the sectoral level, with the services PMI rising to 50.2 in May, from 49.0 in April, as survey respondents flagged fewer concerns about the impact of US tariffs on domestic demand conditions. However, manufacturing output declined at a faster pace.

“The PMIs can be volatile from month-to-month, and the survey has been a poor leading indicator of official GDP growth in recent years. This is largely because the survey tends to pick up changes in mood better than changes in actual activity. Though GDP growth will likely slow in Q2, we think it will remain comfortably in positive territory.

“On the inflation front, respondents reported a softening in the survey's costs and prices balances in May, following a fall in commodity prices and favourable exchange rate developments. This may provide some reassurance to any MPC members concerned by yesterday's upside surprise for inflation. On balance, we expect the MPC to continue cutting interest rates at every other meeting through the rest of this year.”

22 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Public finances remain in a precarious position

  • There was only a small fall in the UK public sector current budget deficit in April, despite the boost to revenues from the increase in employers' National Insurance Contributions (NICs). It will be a very tall order to get borrowing close to the Office for Budget Responsibility's (OBR) full-year forecast.
  • With signs of structural weakness in the public finances, debt servicing costs likely to overshoot March's forecast, and the potential for the OBR to downgrade its growth forecasts to take account of recent US trade policy announcements, the fiscal arithmetic is likely to be very challenging in the Autumn Budget. Talk of the reinstatement of some winter fuel payments and the likely need to spend more on defence will further increase the pressure for tax rises.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The government ran a current budget deficit of £13.9bn in April, £0.4bn less than a year earlier, as tax receipts were boosted by April's increase in employers' NICs.

 “The OBR is yet to publish a month-by-month forecast for fiscal year 2025-2026. However, the official forecaster had expected the current budget deficit to fall by around £25bn compared with its most recent forecast for 2024-2025, which implies a fall of £34bn compared with the latest estimate of actual borrowing from the Office for National Statistics (ONS). Given April's small year-on-year fall, achieving the OBR's full-year forecast of a deficit of £36.1bn looks to be a very tall order.

 “Economic growth has been surprisingly strong in the early months of 2025, so it would be hard for the OBR to judge that higher borrowing was a cyclical phenomenon. The OBR will also come under pressure to cut its optimistic potential output forecasts in light of recent US trade policy announcements, while higher gilt yields and market expectations for Bank Rate will push up debt servicing costs. There's a long time to go until the Autumn Budget, but as things stand, we expect these factors to more than eliminate the slim headroom against the fiscal rules. A potential reversal of winter fuel payment cuts and the likelihood that defence spending will need to rise again will make the fiscal arithmetic even more challenging and increase the pressure to generate more revenue through tax rises.”

21 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Upside surprise for inflation unlikely to alter BoE's cutting cycle

  • Consumer price index (CPI) inflation surprised on the upside in April, largely due to the scale of rises for regulated and indexed prices and a temporary increase in air fares. Headline inflation will likely edge up further over the coming months, before easing from the autumn as the contribution from the energy category fades.
  • Though the Monetary Policy Committee (MPC) will likely be concerned that April's once-a-year rises in indexed and regulated prices were higher than anticipated, its measure of underlying inflation continued to cool. We don't expect today's data to deter the committee from maintaining its established 'cut-hold' tempo.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “CPI inflation surprised on the upside in April, rising to 3.5%, up from 2.6% in March. As expected, the energy category added almost 0.7ppts to the headline rate after Ofgem's price cap rose by 6.4% on April 1. However, the size of once-a-year price rises for other indexed contracts and regulated prices were larger than expected. There was also an unusually high reading in the air fares category as April's price collection dates coincided with the Easter holidays, unlike in 2024.

“Headline inflation will likely edge up slightly over the next few months, but from the autumn inflation should ease as the contribution from the energy category starts to fade.

“Today's data offers mixed messages for the MPC. On the one hand, April's readings for headline and services inflation overshot the Committee’s latest staff forecasts, and the larger rises for services prices that only change on an annual basis mean higher inflation is now baked into these categories for another year. But on the other hand, the MPC's preferred measure of underlying services inflation continued to cool in April. On balance, we expect the MPC to continue cutting interest rates at every other meeting in the near-term.”

15 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Strong GDP growth in Q1 likely flatters underlying conditions

  • UK GDP rose further in March, building on February’s significant increase in activity. March's gain left GDP up 0.7% quarter-on-quarter in Q1, a substantial step up from the soft end to 2024.
  • Q1's strong performance was likely boosted by some residual seasonality, which suggests quarterly GDP growth across the rest of the year is likely to slow. Tighter fiscal policy, the lagged effect of past interest rate rises and higher US tariffs mean the underlying pace of output growth is likely to remain relatively muted this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Building on the strong gain registered in February, GDP rose a further 0.2% month-on-month in March, comfortably beating expectations. At the sectoral level, the story was largely one of noisy data. On the upside, there was a relatively broad-based increase in activity across the consumer-facing services and other services sectors. Meanwhile, the construction sector grew modestly for the second consecutive month. These increases were more than enough to offset some challenges in the manufacturing sector, after an unusually strong outturn in February.

 “Given March's higher reading, quarter-on-quarter GDP growth rose 0.7% in Q1. However, the first cut of the expenditure breakdown painted a slightly more pessimistic picture. There was an unusually large pick-up in business investment, which reversed a surprisingly substantial fall in the previous quarter. Meanwhile, strength in net exports could reflect some last-minute stockpiling before US tariffs came into force. Consumer spending remained soft with early signs of some consumer caution at the start of the year.

 “Looking ahead, quarterly GDP growth across the rest of this year is likely to be slower than in Q1. In part, this is because the activity data in Q1 was probably boosted by some residual seasonality. However, tighter fiscal policy, the lagged effect of past interest rate rises, and the imposition of higher US tariffs on goods exports from the UK and the rest of the world mean we also expect the underlying pace of output growth to remain modest throughout this year.”

13 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Labour market suggests disinflation continues

  • Slowing UK pay growth and a further loosening in labour market conditions will give the Monetary Policy Committee (MPC) more confidence that the disinflation they look for is continuing.
  • However, with pay growth still well above target-consistent rates and changes in US trade policy reducing downside risks, the MPC will still want to tread carefully when it comes to lowering Bank Rate. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Although pay growth slowed in Q1, it remains uncomfortably high from an inflationary perspective. Total pay growth was 5.5%, while the MPC's preferred gauge – private sector regular pay growth – recorded 5.6%, down from 6.2% in Q4. While it is heading in the right direction, pay growth remains significantly above the rates the Bank of England views as consistent with inflation stabilising at the 2% target. But progress from here is likely to be in the right direction, given that pay gains are gradually losing momentum. 

“The unemployment rate rose to 4.5% in March, and while the current data from the Labour Force Survey (LFS) should be viewed with scepticism given its methodological issues, there are signs that the labour market is loosening. Vacancies continued to fall back in March, while employment estimates based on payroll information pointed to a second successive substantial fall in April. The last couple of years of weak growth have seen a tight labour market loosen and this probably has further to run given the UK's relatively modest growth prospects for this year and the likely impact of April's rise in employers' National Insurance Contributions.

“At its last meeting, the MPC maintained its vow to take a ‘gradual and careful’ approach to lowering interest rates. Today's labour market data will have given the MPC slightly more confidence that disinflation is continuing, but it also continues to highlight their difficult balancing act of supporting a weakening labour market that is still generating strong pay growth. With recent US trade policy announcements reducing downside risks, we continue to expect the MPC to cut Bank Rate at alternate meetings, with the next cut coming in August.”

09 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Divided MPC stick to gradual interest rate cuts

  • As expected, the Bank of England delivered another cut in interest rates, lowering Bank Rate to 4.25%. However, the contrast in views between Committee members was surprising, highlighting the lack of certainty on the direction of travel for the UK economy.
  • While the Monetary Policy Committee (MPC) did not take a June cut off the table, there was no clear sign that it intends to break from its current pace of one interest rate cut per quarter. However, its projections indicate that it does still intend to lower interest rates further as it balances the dilemma of weak growth and sticky inflation.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “While it was no surprise that the Bank of England delivered its fourth 25bps cut in interest rates today, lowering Bank Rate to 4.25%, there was an unusual level of disagreement amongst the MPC. The unusually wide divisions appeared as two of the most dovish rate setters voted for a larger 50bps cut based on concerns around the growth outlook, while two hawkish MPC members favoured no change, with inflation persistence remaining a concern. 

 “The MPC stopped short of giving any clear guidance on what it will do at its next meeting. However, while it didn’t close the door on a June rate cut, it appears likely that the MPC will continue with its established pace of one cut per quarter. Recent tariff developments may have pushed the MPC to deliver a cut at this meeting that it may not have done otherwise. But the Committee continues to stand by its intention to lower rates ‘gradually’ and ‘carefully’, keeping them restrictive for some time yet. 

 “In what is a difficult message to land, while the MPC may not intend to speed up the pace of rate cuts, it does expect to continue to lower Bank Rate further as it balances weak growth prospects and sticky inflation. Its updated projections indicate that as interest rates fall back towards 3.5%, inflation will return to its 2% target. However, given the uncertainty around the economic outlook, the Committee will likely continue to tread carefully as it monitors how interest rate cuts and the wider economy play out. We still expect the next interest rate cut to come at the Bank of England’s August meeting.”

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY Comments on Minding the gap

No tax policy announcements but a wealth of tax administration

“Even with no major tax policy announcements in today’s Spring Statement, many businesses will still feel the pinch when measures such as the increase to employer National Insurance contributions announced at the Autumn Budget come into effect next month.

“At the same time, the ongoing unsettled economic and geopolitical environment means many businesses in the UK are continuing to face significant uncertainty with an international tax landscape that is also changing rapidly.

“In response to such choppy conditions, multinationals will be looking to the Government to set out a clear long-term tax strategy, whilst still remaining agile. Providing clear intent and direction for the future of its tax regime – such as that laid out in the Corporate Tax Roadmap – presents an opportunity for the Government to further support the UK’s many points of attraction for foreign investment, and emphasise its position as a safe harbour for global businesses that are grappling with the current market challenges.”

26 Mar 2025 | EY comments | Media contact: Victoria Luttig - Manager, Media Relations, Ernst & Young LLP

EY comments on the absence of pension reform in the Spring Statement 2025 

Paul Kitson, EY’s UK Pensions Consulting Leader, comments on the absence of pension reform in the Chancellor’s Spring Statement:

“Pension reform is a central focus in the Government’s growth agenda, but with nothing new announced in today’s Spring Statement, the industry must now look to the expected Pension Scheme Bill and the upcoming Mansion House Speech. The Bill is expected to outline how surplus withdrawals from defined benefit (DB) pension schemes can be used to support economic growth – something that could unlock more than £150bn for UK businesses to re-invest. Following this, the Mansion House Speech could provide further detail on how pension reform will boost retirement outcomes for many millions of UK savers and support growth for innovative companies."

 

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

Laura Mair, UK Managing Partner for Tax and Law at EY, said:

“Even with no major tax policy announcements in today’s Spring Statement, many businesses will still feel the pinch when measures such as the increase to employer National Insurance contributions announced at the Autumn Budget come into effect next month.

“At the same time, the ongoing unsettled economic and geopolitical environment means many businesses in the UK are continuing to face significant uncertainty with an international tax landscape that is also changing rapidly.

“In response to such choppy conditions, multinationals will be looking to the Government to set out a clear long-term tax strategy, whilst still remaining agile. Providing clear intent and direction for the future of its tax regime – such as that laid out in the Corporate Tax Roadmap – presents an opportunity for the Government to further support the UK’s many points of attraction for foreign investment, and emphasise its position as a safe harbour for global businesses that are grappling with the current market challenges.”

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on Tax policy changes conspicuous by their absence

Chris Sanger, Tax Policy Leader at EY, said: “After weeks of speculation, the Chancellor kept her promise of one fiscal event a year, leaving tax policy announcements to the Autumn Budget. Attention will now turn to June’s Spending Review, followed by November’s Budget, to see whether the Chancellor increases the headroom available within the fiscal rules following the OBR’s latest forecast.

“On tax, it was always unlikely that we’d see any further changes come out of today, particularly given that measures announced last October, such as the rise in employer National Insurance contributions, are yet to come into effect. However, what we may hear in the coming weeks are announcements on tax administration and simplification efforts. While not policy changes, these positive steps include consultations on e-invoicing and cost sharing and have the potential to both reduce the tax gap and attract greater investment in the UK.

“The Corporate Tax Roadmap, published alongside the last Autumn Budget, set out to improve the certainty and predictability of our tax regime. The Roadmap provided the foundation for reform, and the Government may now look to develop this document further, delivering on its aims to simplify the UK tax system and create confidence among businesses and investors, for the benefit of the economy"

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