In the first half of 2025, the UK had the fastest growing economy (1.2 per cent) amongst G7 countries, according to widely reported GDP data.
However, this seemingly strong performance comes with two big caveats, noted Chris Hare, economist at HSBC Global Banking and Markets, on the first day of the Annual Hospitality Conference 2025 in Manchester.
“Performance has been boosted by two instances of front-loading: a big surge in exports to the US in anticipation of higher tariffs, and a flurry of housing market activity in advance of the stamp duty increase in April 2025.”
Nevertheless, the data does indicate some strength and resilience in the private sector, particularly in the UK’s services industry, reasoned Hare.
“Some areas of the economy have shown modest but continuous growth, and compared to manufacturing, the UK services industry is showing a little bit of growth,” he said.
Consumer demand
The UK services industry, which includes hospitality, retail, finance, and administration, accounts for 81 per cent of UK economic output and 83 per cent of employment.
Services have been supported by “the slow and steady pace of consumer demand growth,” Hare said. “Annual growth in real household incomes has been two or three percent in recent years which is not bad compared to historical norms.”
One of the problems for leisure-focused UK hospitality businesses, however, is that household spending has been constrained, with saving rates substantially higher than pre-pandemic levels.
Hare believed that there is scope for households to spend more and save less, “if inflation comes down a bit and interest rates come down a little bit further.”
Leaps of faith
UK CPI inflation currently stands at 3.8 per cent, having peaked at 11.1 per cent in October 2022.
Hare said that HSBC believes inflation could come down to the government’s target rate of 2 per cent by the end of 2026, but that would be reliant on “a few leaps of faith,” regarding what the chancellor Rachel Reeves has in store in her second budget on 26 November 2025.
“Surely the government is not going to raise National Insurance and the National Living Wage by again. Surely water bills aren’t going to go up by 26%,” he speculated.
A bigger leap of faith is required when it comes to productivity, said Hare. From 1995 to 2008 (pre-financial crisis) UK labour productivity grew by 1.5 to 2 per cent each year, keeping pace with the US and other advanced economies.
Since 2008, it has slumped to 0.5 per cent per year, prompting economists to talk about the “productivity puzzle” - a persistent stagnation despite technological advances and labour market flexibility.
“If this productivity rate does not increase, we can only see so much non-inflationary growth in the economy and the government will only be able to raise so much by way of fiscal revenue,” said Hare.
Political fragility
The government could make the case for borrowing to finance investment in a more aggressive way, much as it did when it first came to power, said Anand Menon, director, UK in a Changing Europe.
However, the Labour government is not in a strong position, he reasoned. Despite a majority of 160 seats in the House of Commons, the government was elected by only 34 per cent of the British electorate.
“People wanted to get the Tories out, but we are not an electorate that is wedded to Labour,” he commented.
Brexit has cut UK GDP by 4 per cent over the medium term, but Labour seems reluctant to tackle Brexit head-on because of its non-majority mandate, he argued: “We have a government that can hear the clock ticking and is not convinced it will have long enough to put the solutions in place.”
The session ‘Behind the headlines; balancing global shocks, domestic policy and economic resilience’ was moderated by Andrea Carpenter, director, Diversity Talks Real Estate.