Credit Strategy
UK Confidence Ticks Up After the Autumn Budget
UK shoppers are beginning to return and businesses are breathing a little easier following Chancellor Rachel Reeves’ November Budget. Firms reported their strongest month since before July 2024, while consumer confidence has edged higher. The mood is cautiously hopeful, even as concerns around jobs and inflation remain firmly in focus.
Business Activity Shows a Clear Lift
Recent business surveys point to a notable improvement in momentum. Services recorded their fastest upturn since April, while manufacturers reported stronger factory orders and healthier pipelines. The tone in boardrooms has become more upbeat, with managers describing improved demand visibility and easier conversations with clients.
That said, the rebound is still fragile. Activity levels remain below long-term pre-pandemic averages, and many analysts warn that this could prove to be a temporary bounce rather than the start of a sustained recovery.
Consumers Are Cautiously Optimistic
Households appear to have relaxed some of their belt-tightening since the Budget. Consumer confidence has risen to its highest level since last summer, suggesting people feel slightly more secure about their finances.
However, shorter-term surveys and retailer feedback show a mixed picture. Spending remains selective, with shoppers prioritising essentials, value and promotions over big discretionary purchases. Confidence may be improving, but caution is still the dominant mindset.
Retail Sales Pick Up Into Christmas
Official figures showed retail sales volumes rose in December at the fastest annual pace since April. This suggests shoppers were more active in the run-up to Christmas than earlier in the year, giving retailers a welcome boost and helping to clear seasonal stock.
For consumers, this environment is likely to mean more targeted deals rather than across-the-board spending sprees, as retailers balance improved monthly sales with uncertainty about demand in 2025.
The Labour Market Remains the Weak Spot
Despite brighter business sentiment, the jobs market continues to lag. Payrolled employment fell sharply in December, marking the largest monthly drop in several years, and firms remain hesitant to hire.
This matters because employment underpins consumer spending. If job losses persist or hiring stays subdued, any recovery in retail and services could lose momentum. For households, it reinforces the case for caution — particularly for those considering major financial commitments.
Inflation Is Cooling, but Wages Are the Wildcard
Inflation edged up to 3.4% in December, slightly above expectations, but forecasts still point towards a return closer to 2% by spring. That would ease pressure on household budgets and strengthen the case for interest-rate relief later in the year.
The uncertainty lies in wages. If pay growth remains elevated, inflation could prove more stubborn. For consumers, the key issue is real income: lower inflation helps, but only if earnings keep pace.
What to Watch Next
The next few months will be crucial. Updates on business activity, retail sales and employment will show whether January’s optimism is durable or short-lived.
Shoppers should continue to compare prices and prioritise essentials if job market weakness persists. Small businesses may want to manage cash carefully, secure supplier terms where possible and delay hiring until demand looks more consistent. If inflation cools as expected, lower borrowing costs could offer meaningful relief for both households and firms.
For now, the UK economy shows signs of a tentative turnaround - with genuine bright spots - but a lasting recovery will depend on stronger job security and wage growth filtering through to everyday households.
