The United Kingdom finds itself at a pivotal economic crossroads as fresh data and government plans reveal a complex landscape of challenges and cautious optimism. The latest figures show a cooling jobs market and slowing wage growth, while the government prepares to unveil a critical spending review that will shape public finances and investment priorities for the coming years.
May 2025 marked a significant downturn in the UK employment scene, with a sharp drop of 109,000 payrolled employees—the largest monthly fall recorded outside the extraordinary Covid-19 period since 2014. This decline follows a worrying trend, as employee numbers have fallen in nine of the past ten months after a prolonged 44-month growth streak. When stripping out government-dominated sectors, the picture appears even more stark, with a 1.2% fall in employee numbers since December 2024. Vacancies have also dipped materially below pre-pandemic levels and are falling at a faster pace, signaling that the cooling is not just a blip but a sustained shift in the labour market.
Despite these job losses, some traditional warning signs of economic distress, such as rising redundancy notices, have not yet manifested, leaving economists cautious but watchful. The Bank of England (BoE) has historically viewed wage growth as a critical barometer of economic health, and here too, signals are mixed but trending downward. Private sector wage growth dropped from 5.9% to 5.1% in just two months, a faster-than-expected slowdown that suggests underlying cooling pressures. Firms surveyed by the BoE’s Decision Maker Panel anticipate wage growth could fall further to around 3.5% in the coming months, although this projection remains subject to debate, especially in light of recent increases in the National Living Wage.
These labour market dynamics have significant implications for monetary policy. The Bank of England is widely expected to maintain its Bank Rate at 4.25% in the near term, with economists forecasting two quarter-point cuts later in 2025—one in August and another towards the year's end—potentially bringing rates down to 3.75%. Market pricing has already factored in these moves, influenced by the recent rise in unemployment and slower wage inflation. HSBC’s senior UK economist Elizabeth Martins noted, "Today's weak jobs and slower pay growth may tip the balance in favour of an August cut," underscoring the central bank's cautious but accommodative stance amid evolving economic signals.
On the fiscal front, the government is gearing up to announce its Spending Review on June 11, 2025, a crucial blueprint for public spending and investment over the next three to four years. This review will determine how resources are allocated across government departments, balancing day-to-day operational costs with capital investments in infrastructure, healthcare, defense, and technology projects aimed at stimulating economic growth.
Prime Minister Keir Starmer’s administration has pledged increased funding for defense, transport, and health sectors, reflecting strategic priorities. However, other departments, including policing, affordable housing, environmental initiatives, and local government, are expected to face budget constraints. Negotiations have been intense, with Finance Minister Rachel Reeves working to reconcile competing demands within tight fiscal parameters. A spokesperson for the prime minister confirmed that these negotiations have concluded, emphasizing a focus on "investing in Britain's renewal so that all working people are better off." The government’s commitment to stabilizing the economy and public finances sets the tone for a careful balancing act ahead.
The independent Institute for Government think tank has highlighted the difficult trade-offs involved, noting that while day-to-day spending is set to increase by a modest 1.2% annually in real terms, this translates to an average cut of 1.3% for many areas after accounting for above-average increases in health, childcare, and defense. Investment spending is slated to rise significantly compared to previous years, yet the overall funding will still fall short of the demands posed by ambitious goals such as tackling NHS waiting lists, accelerating decarbonization efforts, and fostering growth.
Minister Reeves has imposed strict "fiscal rules" on herself, requiring that day-to-day spending be fully covered by tax revenues and that public debt as a share of GDP must decline by 2029-30. This self-discipline leaves limited wiggle room, suggesting that unless the government opts for further tax hikes or deeper spending cuts, it may struggle to meet its ambitious targets. Neil Wilson, UK Investor Strategist at Saxo Markets, remarked, "Everything about this [spending review] is political – does the chancellor want to lean into welfare cuts – probably not. We know that defence is being earmarked for more cash. We know that the chancellor will be sticking to her fiscal rules resolutely, although she could tweak them to accommodate more spending." He added that the "easiest way to balance the books is tax hikes," with speculation growing about potential changes to investment taxation in the autumn.
Economic growth projections remain modest. A Reuters poll of economists conducted in early June 2025 anticipates the UK economy will grow by about 1% this year, with a slight acceleration to 1.2% in 2026. This forecast aligns closely with the Office for Budget Responsibility’s latest outlook. The economy surprised on the upside in the first quarter of 2025 with 0.7% growth but is expected to slow markedly in the following quarters, with growth rates as low as 0.1% and 0.2% in the second and third quarters respectively, before a modest 0.3% gain in the final quarter.
Trade tensions, particularly tariff uncertainties with the United States, are not expected to significantly derail growth. Although sectors like automotive, steel, and pharmaceuticals face tariff risks, UK goods exports to the US comprise only about 2% of GDP. Britain’s unique trade deal with the US currently exempts it from some of the higher tariffs imposed by the previous US administration, although a 10% goods levy remains in place.
Inflation remains a concern, expected to stay elevated at around 3.4% in the second quarter and 3.3% in the third quarter of 2025 before easing below 3% in early 2026. This persistent inflationary pressure adds complexity to the Bank of England’s monetary policy decisions, balancing the need to support growth while preventing price spirals.
In sum, the UK faces a delicate economic moment. The cooling jobs market and wage growth slowdown suggest caution, while the government’s spending review will reveal how fiscal priorities align with economic realities. The Bank of England’s anticipated rate cuts reflect a cautious optimism, but the path ahead demands careful navigation of competing economic and political pressures. As Prime Minister Starmer’s government charts this course, the choices made in the coming weeks will resonate through the British economy for years to come.