As we move into the second half of 2025, the UK economy is showing signs of strain, with mixed signals that small business owners should watch closely. Here's a breakdown of the key trends and what they could mean for your business.
1) Inflation: Still Stubbornly High
Despite earlier hopes of a cooldown, inflation remains higher than expected, driven by rising labour costs and persistent energy price pressures. The Consumer Price Index (CPI) is forecast to average around 4.2% for 2025, well above the Bank of England’s 2% target.
This means:
- Higher input costs for goods and services.
- Pressure on wages, especially in sectors like hospitality, retail, and logistics.
- Reduced consumer spending power, which could affect sales.
2) Interest Rates: A Slow Descent
The Bank of England made a cautious 0.25% cut to the base rate in May, bringing it to 4.75%, but further cuts are expected to be gradual. The central bank is wary of reigniting inflation, especially with global uncertainties still looming.
For small businesses:
- Borrowing remains expensive, so refinancing or new loans should be carefully planned.
- Cash flow management is critical—consider reviewing your credit terms and reserves.
3) GDP Growth: Sluggish but Stable
The UK economy grew by 0.3% in Q1 2025, slightly above expectations, thanks to a rebound in exports and delayed investment activity. However, growth is expected to slow in the second half of the year, with full-year GDP forecast at just 0.8%
This reflects:
- Cautious consumer behaviour.
- Ongoing trade frictions, especially with the U.S. and EU.
- Uncertainty in global markets, including China and the Middle East.
4) Unemployment: A Rising Concern
The unemployment rate has edged up to 4.5%, the highest since 2021. While still historically low, this trend suggests a cooling labour market, particularly in sectors hit by automation or reduced demand.
Implications for employers:
- Easier hiring conditions, but also a larger pool of applicants to assess.
- Potential for wage moderation, though skilled roles remain competitive.
5) What Can Small Businesses Do?
- Review your pricing strategy to stay competitive while managing costs.
- Explore government support or grants, especially for energy efficiency or digital upgrades.
- Stay agile—monitor your sector’s trends and be ready to pivot if needed.
For more info, please see: Monthly Economic Review - June 2025 | Insights | UK Finance