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

Retail’s strong start to 2025 may not last

The first quarter saw the UK retail sector make a strong start to 2025. However, the data probably overstates the sector's performance as the Office for National Statistics (ONS) continues to miss how changing seasonal spending patterns are impacting its retail sales estimates.
It looks like 2025 will be another year of modest growth in consumer spending. Real wage growth seems set to slow, while global economic uncertainty will likely lead to heightened consumer caution.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Retail sales continued their strong first quarter by growing by 0.4% in March, having risen by a downwardly revised 0.7% in February to leave growth at 1.6% across Q1. The ONS reported that sales in March were boosted by the good weather at the start of Spring as clothing retailers reported a particularly strong month, with sales growing 3.7% in March. But most other parts of the non-food sector also continued to report decent growth across the month.

“It appears likely that the data is overstating the performance of the retail sector in the first quarter. Nearly all the growth over the last year can be accounted for by the performance in the last three months, with retail sales in Q1 only 1.7% above a year earlier. Continued issues with residual seasonality mean that official activity estimates are likely too strong in the opening six months of the year, which are then offset by overly pessimistic readings in the second half of the year.

“Looking past what was likely an overly optimistic start to the year, 2025 appears that it will be another year of modest performance in the retail sector. Rising inflation and slowing earnings growth are expected to impede the speed at which real wages rise. While consumer confidence consolidated through last year, recent US tariffs announcements look to have hindered sentiment. If this global economic uncertainty continues, consumers could hit pause on some spending decisions.”

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

April’s flash PMIs fall amid elevated trade uncertainty

The UK flash composite Purchasing Managers’ Index (PMI) fell significantly in April to a 29-month low. Swings in business sentiment rather than genuine changes in activity can often drive the survey's outturns, and we think recent US tariff announcements played an outsized role in today's data. But while we doubt that activity is genuinely contracting, we expect the pace of GDP growth to underwhelm.
We think a May rate cut from the Monetary Policy Committee (MPC) is almost certain. With today's survey suggesting that businesses are reflecting higher labour costs in prices, and significant uncertainty around how heavily tariff increases will weigh on growth and inflation, the MPC is likely to stick to its cautious approach to loosening policy for the time being.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “April's flash S&P Global survey reported a decrease in the composite PMI to 48.2, from 51.5 in March. The fall was largely driven by the services balance declining to 48.9 from 52.5. Respondents linked this to rising global uncertainty and subdued domestic demand. Meanwhile, the decline in manufacturing production gathered pace following March's disappointing outturn. The sector's PMI also weakened, falling to a 20-month low of 44.0 in April, from 44.9 a month earlier.

“The composite PMI is a relatively poor leading indicator of GDP growth, particularly during periods that exhibit significant swings in business sentiment. April saw a flurry of tariff announcements by the US government and the increase in employers' National Insurance Contributions (NICs) coming into effect, and we think the fall in the PMIs is heavily driven by sentiment. Nevertheless, while we doubt that activity is genuinely contracting, we still expect GDP growth to underwhelm this year, with higher tariffs adding to the considerable headwinds already facing the UK economy.

“Elsewhere in April's flash survey, respondents reported that higher labour costs pushed up input cost inflation, and businesses reflected this in output prices. A 25bps rate cut at May's MPC meeting is almost certain, so the key question is where rates go from there. We expect the Bank of England to continue to adjust interest rates carefully for now as it monitors how tariffs, changes to employers’ NICs and the rise in the National Living Wage ripple through to the wider economy, but the impact of tariffs on growth could increase the chances of a faster rate of cuts.”

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

Tariffs pose a significant challenge to the fiscal arithmetic

With March rounding out the fiscal year, the public finances remain tight. Borrowing is estimated to have overshot the Office for Budget Responsibility's (OBR) Spring Statement forecast by £14.6bn in 2024-2025.
The fiscal outlook is only getting more challenging for the Government. US tariffs will likely hinder growth this year and next, which will see most of the headroom against the fiscal rules used up. Against this difficult backdrop, a fiscal re-think appears increasingly likely.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The public finances at the end of the fiscal year make difficult reading for the Chancellor. Public sector borrowing was £16.4bn in March 2025, £2.8bn more than in the same month last year. Borrowing over 2024-2025 totalled £151.9bn, a big overshoot of the £137.3bn forecast by the OBR in the Spring Statement.

“Having ended the year on a poor footing, recent US tariffs are only going to make the UK fiscal arithmetic more challenging. The Chancellor’s Spring Statement only left a slim margin for error against the fiscal rules. Most of this will likely be used up as the combination of reduced access to a major export market, a weaker global economy and lingering uncertainty is set to hold back growth. Meanwhile, the rise in government bond yields since the Spring Statement will, if sustained, make it more costly for the government to service its debt.

“A fiscal re-think across the upcoming Spending Review and Autumn Budget looks increasingly likely. Even before recent tariff announcements, we viewed the Spring Statement as a stop gap that left a lot of the big fiscal questions unanswered. At its next fiscal event in the autumn, the Government will likely have to raise taxes or bend its fiscal rules if it wishes to increase defence spending further or help some departments that face very challenging budgets.”

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

Inflation fell again in March, but a sharp rebound is likely

Consumer Price Index (CPI) inflation fell in March, dragged down by base effects in the services category and lower fuel prices. Inflation will likely rebound in April's data as major increases in regulated prices take effect and businesses raise prices in response to higher labour costs. We think inflation will peak in the autumn before cooling, as the contribution from the energy category fades.
Today's data keeps the Monetary Policy Committee (MPC) on track to deliver another 25bps cut at its May meeting. Further ahead, recent US tariff announcements point to a softer demand outlook, but the MPC's concerns about persistent supply weakness will likely convince it to maintain a cautious approach to loosening policy.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “CPI inflation fell to 2.6% in March, from 2.8% in February. The decline was partly driven by strong base effects in the services category. Meanwhile, a decline in oil prices also meant petrol prices fell 1.1% month-on-month between February and March, compared to a 1.8% rise between those months last year. These factors were more than enough to offset the unwinding of February's weakness in the volatile clothing sub-category.

“A sharp pickup in inflation from April is all but guaranteed. Ofgem's 6.4% increase to its price cap, after a large fall last year, means we expect the energy component will add 0.7ppts to CPI inflation in April. A significant increase in water bills means the contribution from the core goods category is also set to rise. In addition, we expect businesses to pass on some of the increase in labour costs caused by the recent rises in employers' National Insurance Contributions (NICs) and the National Living Wage onto consumers. Inflation is likely to peak in the autumn, before starting to cool as the contribution from the energy category fades.

“The MPC has lowered Bank Rate at alternate meetings since its cutting cycle began last summer. With MPC members highlighting the substantial uncertainty associated with the potential inflationary impact of US tariff increases, and the large time lag before the committee sees hard data on how the NICs and National Living Wage rises are playing out, we think the MPC will be content with sticking to its cut-hold tempo for the time being. We expect the next rate cut to come at the MPC’s May meeting.”

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

Labour market poses challenge for MPC

Strong pay growth and signs that UK labour market conditions are only gradually easing continue to present the Monetary Policy Committee (MPC) with a headache. But over the course of this year, the effect of US tariffs on demand will likely see the labour market loosen further.
The MPC remains unlikely to give a clear indication around the pace or extent of interest rate cuts as it balances the prospect of weaker GDP growth against a labour market that continues to generate strong pay growth. We expect the MPC to cut Bank Rate by 25bps in May.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Having picked up towards the end of last year, pay growth remained elevated over the three months to February. Regular pay growth across the whole economy ticked up by 0.1ppt to 5.9%, while private sector earnings growth was unchanged at 5.9%. Although pay growth has levelled off in recent months, it remains far above the rates consistent with 2% inflation, with momentum in pay growth still strong.

“The unemployment rate was unchanged at 4.4% across December to February, but continued issues around data reliability mean this reading should be taken with a pinch of salt. Other indicators suggest that, having loosened over most of last year, the labour market softened slightly further at the start of this year. Payrolled employee numbers declined over the three months to February, while job openings nudged down too. The large increase in US tariffs and the associated policy uncertainty will likely see UK GDP growth slow and unemployment rise over the rest of this year.

“Today's data will not do anything to help the MPC give a clear indication around the rate or extent of future Bank Rate cuts. We think it will continue to adjust interest rates slowly as it monitors how the impact of US tariffs and increases in the National Living Wage and employers' National Insurance Contributions (NICs) filter through to the jobs market and inflation. We expect the Bank of England will cut again in May, and the August meeting looks pivotal as it will represent the first chance for the MPC to give a fuller assessment of the impact of these significant shifts.”

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

February’s rise in GDP overstates underlying strength

GDP picked up substantially in February, but the data appears to overstate the UK's true performance and continues to be affected by residual seasonality.
Despite the significant pickup in activity, growth will likely slow from here. US tariffs will directly affect UK exports, while a weaker global economy and more domestic caution will also prove headwinds to growth. The lagged impact of past interest rate rises and tighter fiscal policy will also weigh on economic progress this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “GDP picked up substantially in February, growing 0.5% month-on-month on the back of a flat reading in January. February saw strong growth in all the main sectors, while within the services sector, consumer-facing services picked up by 0.7%. However, it was very apparent that the biggest gains came from those sectors that fell most in January.

“Having ground to a halt in the second half of last year, the recent GDP data points to building momentum, with activity growing 0.6% across the three months to February. But this likely overstates the true strength of the UK economy and instead reflects ongoing issues with how the GDP data accounts for shifting seasonal patterns. In recent years, the Office for National Statistics (ONS) has repeatedly estimated that GDP growth was strong at the start of the year, only for that strength to fade into the latter half. The monthly pattern of output so far in 2025 is closely tracking last year’s sequence.

“Even abstracting from data quality issues, we expect UK GDP growth to slow from here. Following US tariff announcements, the UK's export sector will feel the direct effects from reduced access to a key market. But the indirect impact on UK trade from a weaker global economy will be just as important. Domestically, more uncertainty will weigh on consumer spending and businesses' capital expenditure decisions. With a cautious Monetary Policy Committee (MPC) likely to proceed with careful interest rate cuts, the impact of past rate rises still to be felt by some households, and fiscal policy tightening significantly, the UK growth outlook remains very challenging.”

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

Stamp duty changes could lead to slower activity in the housing market

House prices fell slightly further in March as the market continued to cool ahead of the change in stamp duty thresholds. Nonetheless, even with mortgage rates increasing in recent months, the market remains resilient with prices 2.8% higher than they were 12 months ago.
The housing market will likely go through a temporary period of slower activity now that the stamp duty thresholds have returned to normal. It is expected to then recover very gradually as interest rates fall slowly, housing affordability remains stretched and uncertainty over the economic outlook causes some major purchase decisions to be postponed.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices fell by 0.5% in March, on the back of a 0.2% decline in February, as demand softened following the January rush to make sure transactions were completed ahead of the change in stamp duty thresholds. Despite the small falls in the last two months, the resilience of the housing market during the second half of last year means that prices are 2.8% higher than 12 months ago and remain close to record highs. 

“Through the turn of the year, the housing market remained solid despite mortgage rates drifting up as home buyers looked to complete their moves before the stamp duty thresholds returned to normal at the end of March. But with the change now in place, this temporary tailwind is behind us. With some house purchases having been brought forward from the middle of the year, the housing market is expected to take a pause for breath over the next couple of months.

“After what is likely to be a period of slower activity over the coming months, the housing market may only see a very gradual improvement over the rest of the year. Interest rates will slowly fall back, but housing valuations are stretched, so affordability will likely remain challenging. In addition, some buyers may decide to hold off making major purchase decisions amid ongoing macroeconomic and geopolitical uncertainty.”

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

March slowdown could signal a challenging few months for the housing market

House prices remained unchanged in March as the support from lower Stamp Duty thresholds faded. But looking back over the last twelve months, house price growth has remained resilient in the face of stretched valuations, increasing by 3.9%.
With Stamp Duty thresholds now back to normal, the next couple of months might be challenging for the housing market. But with interest rates likely to fall gradually over the course of this year, the housing market is still likely to improve modestly.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices were unchanged in March having grown by 0.4% month-on-month in February. But from month-to-month, house prices can be volatile. Looking over the course of the last twelve months, house price growth has shown continued resilience, increasing by 3.9% year-on-year to March as mortgage rates have declined from last year’s highs and a temporary reduction in Stamp Duty thresholds has supported demand of late.

 “Through most of the first quarter, the housing market held up well despite the recent rise in fixed-term mortgage rates as home movers looked to complete their purchases before stamp duty thresholds returned to normal at the end of March. But with this temporary tailwind now behind it, the near-term outlook for the housing market will prove more challenging. Demand will likely be a little softer as some house purchases will have been brought forward from the middle of the year, while mortgage rates remain elevated and housing affordability is stretched. 

 “Nonetheless, after a temporary soft patch over the next couple of months as the effects of the change in stamp duty play out, conditions are likely to still be in place to drive a modest improvement in the housing market over the rest of 2025 as interest rates fall slowly.”

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:

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"

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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Media inquiries

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

Retail’s strong start to 2025 may not last

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

April’s flash PMIs fall amid elevated trade uncertainty

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

Tariffs pose a significant challenge to the fiscal arithmetic

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

Inflation fell again in March, but a sharp rebound is likely

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

Labour market poses challenge for MPC

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

February’s rise in GDP overstates underlying strength

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

Stamp duty changes could lead to slower activity in the housing market

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

March slowdown could signal a challenging few months for the housing market

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

EY Comments on Minding the gap

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

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:

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