Is the UK economy heading in the right direction?

Economy flatlining

Around this time last year, the UK economy appeared to be, if not healthy, at least heading in the right direction. Growth was reported, inflation was decreasing and consumer confidence was improving.

Fast forward a year, there is lower business and consumer confidence and it seems that recovery has stalled, with the latest data revealing an economy that is stagnating - neither shrinking nor growing, but simply … drifting.

Growth has come to a standstill – in fact, on a per capita basis, real output is actually falling. While the economy isn’t in recession (which would require two consecutive quarters of negative growth), there’s little cushion to fall back on.

Any new “shock” event could easily tip the UK into recession, and there are numerous potential sources of such shocks, particularly in the geopolitical arena.

Despite weak growth and low demand, inflation began to resurface in the second half of 2024 and into 2025. Annual CPI inflation reached a 10-month high in January. This presents a dilemma for the Bank of England’s Monetary Policy Committee (MPC).

Raising interest rates to curb rising inflation could stifle economic activity, but taking no action would allow inflation to run unchecked.

Meanwhile, the government is facing growing pressure, as the weak economic performance has reduced the already limited fiscal flexibility in the October 2024 Budget.

Crisis is not inevitable

Clearly, the UK economy is not heading in the right direction at the moment, but this doesn’t mean a crisis is inevitable. The government acknowledges the challenges and has made driving growth its top priority.

The policies delivered so far seem reasonable, but the timeline for achieving economic reform and seeing positive outcomes is likely to be lengthy – decades, rather than years.

A crucial factor will be the geopolitical situation, which is currently unstable, creating significant uncertainty around trade. However, if stability can be restored, it would have a tremendous positive impact, boosting confidence among businesses and consumers alike.

Confidence – both in business and among consumers - is essential. This is why governments try to maintain consistency in economic policy.

It is reasonable to anticipate some policy adjustments in response to the current situation.  The next key opportunity for this will be the Spring Statement on 26 March 2025, though it’s not expected to be a full “budget” event.

If there is no significant improvement throughout 2025, substantial reform may need to be introduced in the October Budget.

What it all means for the food and drink system

Economic weakness is not helpful for the UK food and drink system – it is difficult for any business to thrive when the broader economy is not doing well, and consumers are feeling the pressure.

Businesses have been under economic strain for several years, and the current state of economic “drift” is expected to delay recovery, particularly in the away from home market.

However, while the market is flat, it’s not contracting, and opportunities do still exist, even in such conditions.

Household economic situations vary greatly. Whilst some are under serious financial pressure, others are feeling more optimistic, with a little more money to spend.

These more affluent consumers provide growth opportunities for savvy businesses, as evidenced by Christmas 2025. Although overall trading was lacklustre, quality-focused products and retailers performed relatively well, somewhat paradoxically.

Looking into 2025, many food and drink businesses will likely take an opportunistic approach, looking for ways to exploit minor opportunities as they arise rather than relying on a broad market recovery.