As 2024 draws to a close, it is clear that the º£½ÇÊÓƵ economy finds itself at a critical crossroads, with businesses bracing for what many fear will be a sharp downturn in activity due to a combination of domestic fiscal pressures and international uncertainties. Indeed, some have even suggested that rather than having a growth economy as promised by the new º£½ÇÊÓƵ Government, 2025 could see a recession.
Earlier this week, a survey from the Confederation of British Industry showed that business optimism has plummeted, with expectations for growth at their lowest since late 2022. Both the service and manufacturing sectors are forecasting significant contractions, underlining deep concerns about the country’s economic resilience.
This was underlined by the Office for National Statistics revising GDP figures to show no growth in the last quarter, with real GDP per head dropping by 0.2%, resulting in the º£½ÇÊÓƵ, alongside Italy, having the lowest growth rate in the G7 group of advanced economies.
The recent Budget, delivered by Chancellor Rachel Reeves, has done little to ease business concerns, and the decision to raise £25bn through higher employer national insurance contributions has led to widespread unease in the business community. Many fear this measure will suppress wage growth, stifle job creation, and pile further pressure on already fragile businesses as they curb wage rises, cut hours, and reduce profits to be able to pay this increase.
There are also signs of a slowdown in consumer spending, which could affect the retail sector. November’s retail sales volumes rose by only 0.2%, well below economists’ forecasts of 0.5%. While Black Friday did offer some respite after October’s sharp 0.7% slump, there is a worry that higher-than-expected inflation, along with stagnating incomes, may curtail spending over the Christmas period.
Manufacturing has also been affected, with factory orders falling to their lowest levels since the Covid-19 pandemic, as faltering demand and a cautious outlook weigh heavily on the sector. Internationally, looming threats from the incoming Trump administration’s potential tariffs on EU and º£½ÇÊÓƵ exports add another threat to any potential growth in the economy.
Inflation, which rose to 2.6% in November, continues to erode household purchasing power, and rising costs for essentials such as food and energy mean that households are cutting back on discretionary spending, further straining the retail and hospitality sectors.
As a result, it was not surprising that the Bank of England decided to hold interest rates at 4.75% to reverse these inflationary pressures. While many were expecting interest rates to fall quickly, some are even warning that the Bank may yet face calls to resume rate hikes in 2025, a move that would further exacerbate the cost-of-living crisis while potentially stifling business investment.
Proposed reforms to workers’ rights have led to concerns from employers, and it was reported that businesses may be forced to choose between offering full-time contracts to part-time workers or implementing redundancies. While these reforms aim to improve working conditions, they risk increasing the strain on millions of firms that already feel under siege by a government that doesn’t seem to understand them or the pressures they face in running a business.
The real question is whether there will be opportunities for growth in 2025. Certainly, the increased spending on renewable energy projects could provide a much-needed boost to job creation and attract foreign investment, while planned investments in transport and digital infrastructure offer a chance to improve productivity and stimulate growth.
However, the real priority for the Prime Minister, the Chancellor of the Exchequer, and the rest of the º£½ÇÊÓƵ Government must be to restore confidence and create a stable environment for investment and growth. If things do not go to plan, then they may also need to re-examine fiscal policies to strike a balance between responsibility and support for businesses. Consumer demand may also need to be stimulated through targeted measures, such as temporary VAT reductions on essential goods or direct financial support for low-income households, to alleviate inflationary pressures and boost spending power.
Therefore, 2025 looks set to be difficult for many businesses, not only because of the worsening fiscal situation but also because of the increases in employers’ national insurance contributions and the proposed changes to employment law, which could add further costs to employing people.
Whilst it could be argued that the negative effect of these policies on the economy has been self-inflicted, there is also an opportunity for the º£½ÇÊÓƵ Government to look carefully at how to stimulate businesses to grow over the next year. For example, targeted tax reliefs for SMEs, particularly those investing in innovation and sustainability, could encourage long-term growth whilst more direct support measures could include providing low-interest loans and grants to businesses in sectors most affected by any downturn. Additionally, investing in skills training and apprenticeships tailored to industry needs could help firms address labour shortages and build a more resilient workforce.
But whatever happens, it is now clear that the economy will not develop by just taxing businesses, and it is critical that entrepreneurs, who are the wealth creators in this country, are encouraged and supported to maximise the opportunities for growth in 2025.
