Despite a turbulent start to 2025 – compounded by an escalation of ongoing conflict in the Middle East – UK equity markets performed relatively strongly over the first half of the year. The FTSE 100 Index rose by 7.2% on a six-month basis, outperforming the US Dow Jones Industrial Average Index and the S&P 500 Index, which rose by 3.6% and 5.5% respectively.
- The Bank of England warned of an increasingly uncertain outlook
- The CBI downgraded its UK growth forecast
- CPI inflation eased to 3.4% YoY
UK outperforms US over H1: despite a turbulent start to 2025 – compounded by an escalation of ongoing conflict in the Middle East – UK equity markets performed relatively strongly over the first half of the year. The FTSE 100 Index rose by 7.2% on a six-month basis, outperforming the US Dow Jones Industrial Average Index and the S&P 500 Index, which rose by 3.6% and 5.5% respectively. During June, defence stocks were boosted by the news that the UK had agreed to spend 5% of GDP on national security by 2035. Over the month, the FTSE 100 Index edged 0.1% lower, while the FTSE 250 Index rose by 2.8%.
“‘The US-China relationship is the centre of this whole thing, really’” (BoE Governor Andrew Bailey)
Trade tensions: the Bank of England’s (BoE’s) Monetary Policy Committee held interest rates at 4.25% at its June meeting. Giving evidence to the House of Commons Treasury Select Committee, BoE Governor Andrew Bailey said that the path for UK rates remains downwards, although ongoing tariff-related uncertainties means that the pace of future cuts is shrouded in much more uncertainty. He called for countries to return to the multilateral table, but commented: “The US-China relationship is the centre of this whole thing, really.”
Elevated uncertainty: the Organisation for Economic Cooperation & Development (OECD) warned that the UK’s “very thin fiscal buffers” might not provide sufficient support without breaching fiscal rules in the event of an adverse shock to growth. The OECD expects the UK economy to grow by 1.3% this year, slowing to 1% next year, citing “heightened trade tensions, tighter financial conditions and elevated uncertainty.” Elsewhere, the Confederation of British Industry (CBI) predicted that UK growth will slow as companies struggle with higher labour costs, inflationary pressures, and global uncertainty. The CBI cut its forecast for UK economic growth this year from 1.6% to 1.2%, and next year from 1.5% to 1%.
Worsening outlook for living standards? Real household disposable income per head posted its first quarterly decline since early 2023, indicating that the outlook for UK living standards may be deteriorating. Meanwhile, having risen by 1.3% in April, UK retail sales volumes dropped by 2.7% in May, representing their fastest monthly decline since December 2023. The annualised rate of consumer price inflation eased from 3.5% to 3.4% in May as lower prices for transport were offset by higher food costs.
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