“Could you all just cheer up a bit…” A line that might conjure up images of Basil Fawlty but could equally apply to the London economy right now.
On the day of the latest GDP figures confirming that the economy grew by just 0.1% in the final quarter of last year, BusinessLDN’s economic insights briefing with the Bank of England offered some pointers on what to expect in the year ahead.
Amongst businesses, caution is currently the watchword, whether it be hesitant consumers in the hospitality and retails sectors through to capital providers sitting on lots of money but being careful about how and when to deploy it.
Our Slido poll captured the mood in the room:
74% said their expectations for growth in 2026 were broadly neutral compared to last year;
On hiring intentions, 45% said they were reducing headcount and 41% are holding steady; and
50% opted for a reduction in taxes or employment costs as the measure that would most help to boost growth in their business.
Against that backdrop, what’s on the minds of the rate-setters in Threadneedle Street?
As we saw, it was a marginal decision of 5 – 4 in favour of holding rates. The big debate is how close to the trough of this rate cutting cycle we are. Financial markets are pricing in two further ¼ point cuts this year. If they’re right, this would put the interest rate cycle more in line with what was the norm prior to the financial crisis.
As ever, there are upside and downside risks. Although dissipated, inflation risks have not gone away. On the other hand, the weaknesses in the economy are clear to see.
Inflation and jobs continue to be closely scrutinised. Inflation is forecast to slow quite quickly in the coming months, for example as policy action is set to bring down energy costs. Wage growth is also expected to moderate somewhat further, with wage growth in the private sector set to dip below 3.5% this year. The big question is whether the distribution curve of pay expectations has now shifted left or will higher wage settlements prove stickier? A flat employment market, with a lack of confidence in hiring, and the unemployment rate ticking up both in London and across the UK might reveal the answer…
A few other trends worth noting:
Mandates and contracts are taking longer to win, due to ongoing uncertainty in the marketplace.
Budget speculation unquestionably weighed on activity in the second half of last year, and we’ve yet to see an uplift from this.
The opportunities and challenges of AI will likely be felt sooner and more profoundly in the capital than in other cities given the industrial mix of London’s economy.
Big thanks to the team at Gateley for hosting us, to Lai Wah Co from the Bank of England for her expert insights, to Alex Jan at the Central District Alliance and to Richard Healey at Gateley for sharing their state of trade insights and to Muniya Barua for steering us through the conversation.