The UK economy is experiencing a sustained slowdown

Recent PMI preview data shows that the UK economy is essentially stagnant at the beginning of 2025. Although the economy still maintains a weak growth momentum, avoiding a recession, the risks it faces are biased towards a downward trend. The business activity in January was sluggish, and companies remained pessimistic about the future prospects. The demand environment continued to deteriorate, and the number of new orders significantly decreased, which is a worrying trend.

Firstly, forward-looking indicators indicate that businesses are becoming increasingly pessimistic about the future economic situation, especially against the backdrop of the UK government's plan to implement budget adjustments in April. The concern that budget changes may lead to an increase in employee costs is spreading within companies, directly affecting the performance of the job market. In addition to layoffs during the pandemic, PMI data shows that the unemployment rate in the past two months has reached its highest level since the global financial crisis in 2009.

Secondly, the performance of major industries in the UK is generally sluggish. The business activities of the service industry slightly increased in January, with a faster growth rate, but the overall output growth rate remained the third lowest in the past 14 months. Consumer oriented service providers are particularly facing weak market demand. At the same time, manufacturing output shrank for the third consecutive month in January, although the decline slowed down slightly and overall output only decreased slightly. Since last summer, the previous growth momentum has gradually faded away. At that time, companies generally reported that the economic situation had improved with the optimistic sentiment before the election and steady corporate growth. However, the new government's rhetoric and policy implementation have been met with negative reactions from businesses and households, and confidence levels have continued to decline in the past few months. Earlier surveys showed that households' expectations for future financial conditions fell to the lowest point in a year in January, while PMI preview data indicated that businesses' confidence in the outlook for the next 12 months further deteriorated in January. Enterprises' expectations for output in the coming year have also dropped to the lowest level since December 2022. Since the announcement of the budget, business confidence has continued to decline, far below the long-term average level.

Furthermore, the decline in business confidence, coupled with the continuous decline in new order volume, led the company to implement large-scale layoffs again in January. The PMI data shows that the number of employed people has been decreasing for four consecutive months, and the unemployment rate in January has only slightly decreased from the nearly four-year high set in December. Apart from the pandemic, surveys over the past two months have shown that the unemployment rate has reached its highest level since the 2009 financial crisis. There have been significant layoffs in both the manufacturing and service industries, particularly in all major sub sectors of the service industry where there have been widespread wage cuts.

At the same time, the input costs of goods and services increased significantly in January, which usually reflects a trend of suppliers pushing up prices. These price increases are usually attributed to wage increases and changes in company budget related policies resulting in increased employee costs. The rise in energy costs and the increase in import prices have also become common reports. Measured by goods and services, the increase in input costs in January reached the fastest pace in the past 20 months.

Moreover, as companies pass on cost increases to consumers, the prices of goods and services also rise, and the rate of increase accelerates. The latest price data shows that the price increase is the largest in a year and a half. This trend is worrying, especially in the service sector. Due to the stubbornness since the epidemic, the inflation rate of service prices further accelerated in January, reaching the highest level in nearly a year and significantly higher than the long-term average. The rate of increase in commodity prices is also accelerating, and the inflation rate has reached its highest point in four months.

Overall, although the market expects the UK economy to rebound in 2025, the realization of economic potential is still severely constrained due to low productivity, and future economic growth rates are expected to be much lower than pre crisis levels. Frequent economic downturns may have a serious impact on people's livelihoods, and the UK government needs to prepare measures in advance to ensure that the economy can gradually recover and avoid further deterioration.