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The Macro Brief – Looking for good news in the UK
692 Plays2 days ago
With the UK facing a long list of economics challenges, Liz Martins, Senior UK Economist, considers whether there is any light at the end of the tunnel.
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Transcript
Introduction and Context Setting
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:23
Speaker
This
UK Economic Challenges Overview
00:00:24
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podcast was recorded for publication on the 1st of May 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player. And don't forget to follow us.
00:00:35
Speaker
Just search for The Macro Brief wherever you get your podcasts.
00:00:45
Speaker
Hello, I'm Piers Butler and welcome to The Macrobrief, our weekly look at the issues driving financial markets across the globe. Now here in the UK, there is a long list of problems facing the economy. Growth remains stagnant, inflation is stubbornly elevated, borrowing is high and UK bond yields are above their US and German peers.
00:01:04
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Add on to that the prospects of US tariffs and the outlook appears to be pretty gloomy. On today's podcast, we're assessing these issues and finding out if there's any light at the end of the tunnel.
Insights from Liz Martins
00:01:14
Speaker
To do that, I'm joined in the studio by Liz Martins, senior UK economist.
00:01:18
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Liz, welcome back to the podcast. Thank you very much. So the last time we had you on the podcast, which was back in February, i likened the state of the UK economy to the weather, which at that point was pretty gloomy.
00:01:30
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and The weather has definitely improved, but the perception is that the UK economy hasn't really. And we've just had some data on the latest figures for borrowing, which seem to have deteriorated. So is it all gloomy?
00:01:43
Speaker
Well, I think on the public finances, it really is mainly gloomy. So, of course, we've just had the data that suggests that full year borrowing for the fiscal year that that ended in March um was £15 billion pounds over what the Office of Budget Responsibility had forecast just four weeks earlier. So it's a huge overshoot, really, in a very short space of time. And the worry, of course, is that that um Excessive borrowing carries on through the current fiscal year and that sliver of headroom that Rachel Reeves left herself in the spring statement ends up getting wiped out, which means more fiscal tightening coming in the autumn, whether that's spending cuts or tax rises, neither of which is great for the economy.
Interest Rates and Market Predictions
00:02:21
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One of the bits of good news is potentially the outlook for UK interest rates. And in fact, as a team, we've been anticipating more rate cuts than than the market, certainly you know a few months ago. Has the market moved closer to our view that the Bank of England is is likely to do more rate cuts this year?
00:02:38
Speaker
Yeah, it absolutely has. So um just before 2nd of April and the tariff announcement, the market was expecting only two rate cuts from the Bank of England from here to 4%, stabilising around there.
00:02:49
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Since then, it has moved towards our view, which I should say sees bank rate falling by 25 basis points per quarter until we get to 3% September of 2020. 2026. So that's, um that's our view. ah The market has moved towards there, I think it now has a terminal rate more than around 3.3, 3.4%. So it's moved much closer to what we think. And what's interesting um is that it fell to to to kind of three and a half percent in the wake of that um tariff announcement. And some of that tariff policy has been softened and rode back and other markets have recovered.
00:03:23
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But that BOE pricing has stayed. So yeah, the market has moved towards us.
Impact of US Tariffs on UK
00:03:27
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And talking about tariffs, how difficult a situation is that for for the UK? I mean, it's it's a difficult question in a way because we don't really know where we're going to end up. But let's assume that 10% tariffs are imposed on the How bad would that be?
00:03:42
Speaker
Well, it's obviously not great. It's the 10% baseline. It's so the 25% on cars. You know, these things really do matter for the the companies and the sectors that are affected. um But for the UK as a whole, we were never going to be the biggest victim of this thing. So, you know, 40% of our exports are goods of that 15% go to the US. So this was never going to be as seismic as it is for kind of Mexico, Canada, China, those kind of countries which really depend on exporting to the US. Of course, there are indirect effects if the global economy slows sharply. And in fact, if we look at the the PMI surveys for April, it was the service sector um that saw the biggest drop um in confidence and activity, not not the manufacturing sector.
00:04:22
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um But even so, I think, you know, we are somewhat protected relative to the big manufacturing exporting economies. Now, you're out on the road a lot.
00:04:33
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You talk to a lot of ah clients, a lot of corporates. what What's the mood out there? What are they what are they worried about?
Business Strategies Amid Economic Pressures
00:04:41
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Well, look, um sad to say, we're still talking about the October budget and it's been at least six months and since that was delivered. But the increase in tax on national insurance contributions, so the employer ah national insurance contributions, has been a really big deal for the companies that we talk to. um It comes up all the time and, you know, companies have different combinations of of ways of dealing with it.
00:05:03
Speaker
um whether it's lower headcount or lower bonuses or lower pay rise. And some of them, of course, ah ah what ah will pass um some of this higher cost on as inflation. We think that will be a temporary spike rather than a ah spiral, but that some of it will and we'll see that in in possibly in the so-called awful April inflation numbers.
00:05:25
Speaker
um But very few are unaffected by this. So it does feel like it it was a really big deal. And it was the latest in a series of shocks, of course, because UK businesses have been through Covid and Brexit and the cost of living and interest rates and the mini budget and, you know, now the tax rises and and now the tariffs. So it's one thing after another for businesses. And, you know, all I would say about it is we continue to be ah amazed and impressed at how resilient they are. And, you know, you you roll with the punches and you keep on going and and dealing with all the shocks. and and And I'm sure they will continue to do so.
Signs of Resilience in the UK Economy
00:05:56
Speaker
Yes, that resiliency is is really quite impressive, isn't it? and It is impressive. And actually, to that point, to ah to to to end our conversation on a high, you know, we were starting to see some better signs in the economic data just before the tariffs, actually. So we saw a really good number for February GDP growth, not all of which can be attributed to pre-tariff front loading.
00:06:15
Speaker
um And we saw some recovery in in the retail sales data as well. So, you know, even with all these headwinds, there was some signs of life coming through. Now, whether that withstands the the tariff shock, we will have to wait and see. But as you say, resiliency is absolutely key and something that continues to impress us.
Upcoming Bank of England Meeting and Expectations
00:06:31
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And just to finish on, in terms of key dates and announcements, what are what are the next things that we should be focusing on? Well, the next big thing is Thursday 8th of May, which will be the Bank of England meeting, at which we are expecting um a fourth interest rate cut. So we'll see the 25 basis points down to 4.25%.
00:06:47
Speaker
um The market is pricing in a small possibility that they could cut by even more, maybe by um but by 50 basis points. Don't think that will happen, but you never know. and And the Bank of England may want to open up and just loosen up the language a little bit to suggest that actually if we need to take a slightly more activist stance here, and we stand ready to do so. So we'll see whether they go as far as saying that. But um certainly, as as as we discussed earlier, the market has moved and expecting a more dovish Bank of England going forward.
00:07:15
Speaker
Let's hope so. But for now, thank you very much for joining us, Liz. Thank you.
00:07:22
Speaker
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Focus on Asia and Upcoming Events
00:08:06
Speaker
Before we go, a date for your diary. We're hosting our next Live Insights event on Wednesday, the 28th of May. And this time, the focus is on all things Asia. I'll be putting your questions to the co-hosts of our sister podcast, Under the Banyan Tree.
00:08:20
Speaker
That's Fred Newman, our chief Asia economist, and Harold van der Linde, head of Asia Equity Strategy. The event is open to everyone. You don't need to be an HSBC client, and it promises to be an interesting and entertaining conversation.
00:08:33
Speaker
For details on how to sign up, email askresearch at hsbc.com or head to LinkedIn and search for hashtag HSBC research. And finally, a reminder that HSBC clients can keep up to date on our latest research by downloading our app from Apple's App Store or Google Play.
00:08:50
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And don't forget to subscribe to The Macro Brief wherever you get your podcasts.
00:08:57
Speaker
So that's all from us this week. Thanks for listening and we'll be back next week.
00:09:25
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.