The UK economy is going to hell in a handcart. Opinion polls suggest nearly two-thirds of the public expect things to be in a worse state in 12 months’ time. For sure, it’s not going to be a great year, but most economists still think GDP will actually rise at roughly the same rate as it has done in 2025 – by something like 1.5%.
The business sector is shrouded in deep gloom. The Institute of Directors’ business confidence index is close to its all-time low. However, the S&P PMI composite output index, a closely watched measure of activity in the services and manufacturing sectors, has expanded at a reasonably brisk pace in December to above 50. That suggests things are ticking along quite nicely.
The UK has gone back to the 1970s as the sick man of Europe. That has become a tabloid trope. But the last time PWC polled its large group of global chief executives, the UK was seen as the second most attractive place to invest in the world, behind the US but ahead of Germany, China and India. That may be so but as the tabloids constantly remind us...
The UK is now crushingly overtaxed. It’s true that the tax take as a share of the economy is heading towards the highest level since the 1940s – near to 34.4% – but it’s still pretty much in line with the other rich members of the OECD, and below most other European countries.
People who can afford to leave the country are doing so. So say a range of reports in recent months. Certainly, a number of very wealthy people have gone away for tax reasons: they tend to be a rather mobile bunch. But if you adjust for changes in the way the data is collected and for movements in the student population, it seems likely that rather fewer people have been leaving the country. And it’s not one-way traffic: according to the New Yorker, a record number of Americans applied for British citizenship from January to March this year. Call it the Trump effect.
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Government debt is reaching unsustainable levels. That is the implicit and much repeated message from His Majesty’s Treasury and the level is much higher than it has been in recent decades. But a set of revisions by the number crunchers shows the economy performed noticeably better in the last few years than had been thought – and a bigger economy means that government debt doesn’t loom as large in the picture as first appeared. The latest estimate is that public debt is 94.5% of GDP – not great, but not a catastrophe. And the cost of government borrowing has edged down since the budget, suggesting a slightly greater degree of confidence in how it is all being managed.
Britain’s entrepreneurial spirit has been crushed by a combination of socialism and the deep state. Put that one down to Liz Truss and her cheery YouTube show. In fact, the UK is not far behind the San Francisco Bay Area when it comes to the funds raised for seed and early stage companies. Further up the scale, there are some big fintech success stories: Revolut has become Europe’s most valuable tech startup in years (yes, I know its chief executive has apparently shifted his residence to Dubai, but you can’t have everything). And there are some highly innovative businesses out there. One area to watch: quantum computing, where real signs of strength are emerging in Britain.
Cost pressures are intense, thanks in part to clunking government policy measures. That’s what any chief executive will tell you, and it’s certainly been true over the past year and more. But things should become easier in the coming months. Energy prices are coming down. Interest rates may not fall much further after Thursday’s cut to 3.75%, but they are more likely to go down a bit than go up. The pace of growth in wages is slowing. Inflation dropped to 3.2% in November and the Office for Budget Responsibility thinks the figure for 2026 will be down to 2.5%.
The government’s green agenda is putting a crippling burden on business. That's according to the Reform party, which plans to reverse it. Yet the green growth story is beginning to emerge. The regulator has given the go-ahead to investments of £90bn in gas and electricity networks by 2031. Rolls-Royce has orders for three small nuclear reactors in Anglesey. The giant Sizewell C reactor project is grinding into life. And last week Nissan started production of its third generation electric vehicles in Sunderland.
The government has made avoidable blunders in its management of the economy over the past 15 months, starting with the misjudged attempt to withdraw the winter fuels allowance and most recently with the chaotic lead-up to last month’s dispiriting budget. Hmmm. That one’s not so easy to challenge.
The bottom line – it’s not a fantastic outlook, but it’s not as bleak as the front pages might make you think. Let’s try to cheer up a little in the new year.