August 2025 Economic Updates

Kirsty: Hello, and welcome, and for any new audience members, this is Capitalise's Economic Update, a roundup of the key economic and market activity. We aim to translate all the headlines and let you know what's going to impact you out there, the owner-managed businesses in the UK.

But thankfully, I have Paul Surtees here to help me understand it all. Hello, Paul.

Paul: Hey, Kirsty, how are you? Are you good?

Kirsty: I'm good. So, we had the Bank of England decision last week, where, after a very tight vote, they finally decided to cut rates from 4.25% to 4%.

Now, explain what this means for the economy and the SMEs.

Paul: Well, first of all, Kirsty, I think it's important to recognise that it was a very tight vote. It was a 5-4 vote. It was actually the first time I can remember, doesn't mean it's not the only time, it's the first time I can remember the MPC having to re-vote.

So, four members wanted to hold rates, four members wanted to cut at 25 basis points, quarter of a percent, and just one person wanted to cut rates by half a percent, and so it was in a deadlock. So they had to go into a second round. And I think, really, that tells you everything you need to know about where we are from an economic perspective. Those worried about inflation, those worried about growth, and evenly split at the highest levels.

The reason they ultimately did cut a quarter of a percent is that they continue to believe that disinflation will continue, i.e. inflation is going to continue coming down.

But it isn't even across the economy. 12-month CPI was up at 3.5% in Q2 due to energy, due to food and due to various other elements. Pay growth in wages does remain a little bit elevated, but it is falling.

But, and this is why, crucially, they're looking through this kind of uptick in inflation, is that they know, they don't believe, they know that there are certain elements that are going to mechanically drop out of a 12-month rolling average, which effectively is what the CPI number is. So, the large jumps that we all felt in energy costs in the back end of 2024, they're gonna drop out the big food surges in Q4, they're gonna drop out. So the BOE are absolutely expecting inflation to start to move back down towards their 2% mandate, hence the cuts that we've seen over the last 12 months, and hence a belief that they can be, cautious and gradual in their continued cuts, over the quarters ahead.

Kirsty: So, what are the key challenges to the economy and for the Bank of England?

Paul: Well, unfortunately, UK growth continues to be subdued, and obviously, the Chancellor is going to feel that when she comes to her statement, more on that in a bit. But really, the labour market is loosening up, and one of the challenges that the Bank of England has is the ONS data is really poor. But if we look at recruitment, there is actually some quite rich survey data which has just landed. So, KPMG and the Recruitment and Employment Confederation have just released their survey today. They're basically saying that UK employers are cutting back because of high labour costs. And they're also worried about further tax increases.

Surveying the recruiters, both for permanent and temporary. If you look at it, it's actually close to a two-year low, so it's pointing to a drop in vacancies, there's slower pay growth, there's a glut of candidates, and there's also concern about uncertainty in employment law with the changes that have happened.

Second survey, the Chartered Institute of Personal Development and people kind of working very closely with HR, they're basically saying that business confidence is stuck at a COVID low, and in their survey, only 25% of businesses are expecting their staff to increase in number over the next 12 months. And then finally, perhaps in competition with KPMG, BDO survey has outlined that tax and minimum wage increases that we've experienced through employers NIC, have all squeezed the labour budgets, and that's the principal reason that we're not seeing more hiring.

So therefore more vacancies, lots of people on the market. Ultimately, that is taking a little bit of the heat out of the employment market, and therefore inflationary pressures.

Kirsty: So, three really good quality, well-respected surveys there, but why is this data causing an issue for the Bank of England?

Paul: Well, you would think, wouldn't you, that we would have our data all sorted, we've got the ONS. But unfortunately, the survey data for employment is really poor with the ONS. It's been mentioned for many years now, but there's only a 17% survey rate, people actually going through and answering it. And therefore, it's very difficult to understand what the supply side is, how many people are actually available for work. So whilst these surveys we've just talked about our business side. What are you doing about your employment? Are you hiring more people? There's much less transparency when it comes to what we are doing as employers and how we are responding to this. So what is very odd is that the ONS data is suggesting that employment is going up, more people are employed, and that unemployment is also going up. So, you know, kind of how is that possible? But ultimately, it comes down to the survey data and who is actually participating. But conversely, if you look at payee data from HMRC, ultimately, the amount of employment is going down, the number of employees. So, wages are really a very key driver for domestic inflation, and that is one of the challenges why the Bank of England is so split.

Kirsty: Okay, so back then to this fact that we've had a drop to 4% in the base interest rate, so what's the impact of that for SMEs and their borrowing, and what are we hearing at Capitalise from the lenders in the market?

Paul: Well, I think, naturally, and you'll see this with respect to mortgages and so on, there's an expectation that rates are going to fall. I think that that is true for the very best businesses, who are borrowing potentially against secured assets like property, who may be over and obviously those who are at a variable rate. But the vast majority of borrowing is moving away from the high street, so it's not necessarily the very best of businesses. And they are typically borrowing from challenger banks and fintechs, and their borrowing, themselves as lenders tends to be fixed. So we will probably be waiting a handful of months before we start to see rates coming down.

But given that the expectation is the Bank of England will continue to cut rates, we will expect to see some lower rates, coming in the near future.

Kirsty: Okay, go on then. What is your prediction for the rest of the year?

Paul: Well, I'm getting a bit close now, Kirsty, because at the beginning of the year.

Kirsty: January's easy, Paul, now we're getting September.

Paul: I know we're getting into the meat of it. I called for 1% of rate cuts across the year. We've had 0.75, so 3 quarters of a percent, and we've got 3 meetings left.

I think a gradual and careful approach to cutting remains from the Bank of England, given this kind of split. I can easily imagine next month they will hold fire, so that'll leave us with two meetings. I can see us getting to 1% by the end of the year, but it's obviously going to be close front.

Kirsty: Yeah, so just to explain, they don't have meetings, as we call them. Policy meetings, which is when they determine what they're going to do with the interest rates, they don't have those every month, they're spread across the year. So, what is the key risk, then, for the UK in a wider sense?

Paul: Well, I think taking the lead from your question, the UK, so ignoring global shocks, really the next big hurdle is the autumn statement, because as we've seen, with increasing veracity, the Chancellor has got an autumn statement coming up, in October, November time. And obviously, there's a big, a big hole to fill. Depending on who you believe, it's $40 billion, and if she wants to maintain her headroom of 10 billion, that's $50 billion that she's got to find from either cutting spending plans, standing up against, you know, wage demands from the NHS and, you know, other public servants all, raising taxes. And obviously, the big, big, big manifesto promise was that she was not going to touch any of us as consumers, so the sort of income tax, VAT, and, employee, not employer, national insurance. So that's going to be a big test, because it's difficult to see how she can raise $40 billion outside of those three.

So, maybe, thinking a little bit left field then. Kirsty, what else is happening for businesses, and, you know, what else should we be thinking about?

Kirsty: Yeah, so obviously the autumn statement is a big one. We know it's going to be between… well, we'd say we know, we think we know, it's between the 28th of October and the 4th of November, which is Tuesday to Tuesday, that week sometime, not yet been announced. But aside from that, we've got President Trump still over in the States, jumping between various tariffs and dates when things are going to kick in and not kick in and so on. And although the markets, certainly in the States, just appear to be ignoring him at the moment, now, they haven't really been impacted by all these almost daily announcements. There is no doubt that all of this uncertainty causes Global concerns for trading businesses, because you know, they just can't make decisions at the moment. So, those continue to rumble on with the tariffs and the various things that he's announcing.

But back in the UK, the government has launched something really positive. It's called the Small Business Plan, which covers lots of things, but includes a late payments package which includes more legislation.

Which they're hoping will save SMEs time and money chasing invoices. Apparently, it is the most significant package of legislative reforms in 25 years around late payments. Also in this plan, there's news of a new business growth service, more commitment to fund for both the British Business Bank and the UK Export Finance Arm, and they're going to make SMEs a national priority for winning public sector and government contracts, so all good news, well worth a read, makes you feel a bit happier. Then, just before the autumn statement, in terms of data prints that are coming out, we have, of course, got the Bank of England meeting on September the 18th, which you mentioned. And of course, we've got the usual monthly inflation data and GDP data from the Office of National Statistics, which, of course, the Chancellor is going to be watching very closely.

Paul: So… What can businesses do, what can advisors do from here on out?

Kirsty: So, well, we've said it before, and we're going to keep saying it, the key word now is resilience. So, companies that just can't withstand an economic or a tax shock are not going to survive. I just read this morning about a recruitment company that thankfully has been sold in part called Challenge Recruitment Group, which had £445 million pounds of revenue, a substantial company, but it went into administration in July. Their employers' national insurance increases really impacted their customers and the amounts that they were hiring their temporary staff which then impacted on the company's ability to pay HMRC and its own cash flow, and then other customers started getting worried about their stability, so it just becomes a complete domino effect when it starts.

 Now, none of us have got a crystal ball, we don't know what's going to happen either in this country or overseas, but we need to be able to find ways in our own companies, and if you're an advisor for your clients' companies, to find ways to strengthen those balance sheets.

Focus on resilience and having access to cash flow, so that you can go to a new source of cash flow, just in case, all of a sudden, it isn't business as usual.

And I know, Paul, you're going to record a video about resilience, aren't you? And this is going to be published on our usual social media channels, LinkedIn and Instagram, so just search for Capitalisers.

Paul: Yeah, indeed. So, everybody give it a good follow, and, you know, hopefully that'll drop into your inbox and stuff as soon as you can see it. I think, really what, actually, I'm hearing is, as we've talked about before, is control the controllables. So, a lot of what we just talked about is way beyond my pay grade, your pay grade, everybody's pay grade that's listening.

But it is really important to understand what's coming, so whether we know that wages are going up, going down, what the impact on inflation is.

But really focusing on what we can do on our own businesses, so that we are resilient, so that we can actually make most of the opportunities as they arise, but defend against these exogenous shocks as and when they do materialise.

Kirsty: That's right. Thanks for your time, Paul.

Paul: Absolute pleasure. Good to see you again. Cheers, everyone.