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12 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Jobs market offers MPC little confidence on disinflation

• Although the UK labour market continues to loosen, there are no signs that the jobs market is collapsing, while the cooling in pay growth remains gradual. 
• With the Monetary Policy Committee (MPC) more concerned about sticky inflation than the jobs market, it will likely want to see further evidence of disinflation before it considers reducing interest rates. No change in September seems almost certain, but a skipped cut in November is a real possibility.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Today's earnings data showed that progress on pay pressures remains slow. Looking past bonuses, pay growth remained stuck at 5% in Q2, still far above the rate consistent with inflation settling at the 2% target. But survey evidence from the Bank of England suggests that momentum is fading, with pay settlements for the coming 12 months pointing to wage increases of around 3.5%.

“Although the labour market is loosening, it is doing so gradually. The unemployment rate remained at 4.7% across the three months to June, although ongoing issues with the Labour Force Survey (LFS) means a wider range of indicators should be taken into account to gauge job market conditions. Ongoing uncertainty and rising costs from the national living wage and employer National Insurance Contributions (NICs) increases have seen hiring plans weaken as vacancies slipped slightly further below their pre-pandemic level. Indicative payroll estimates for July suggest the number of employees fell by 8,000 on the month, the smallest decline for six months. However, these estimates are subject to large revisions, which can substantially change the picture of the jobs market.

“August's knife-edge vote to reduce interest rates made it clear that the Bank of England is now far more concerned about inflation getting stuck above 2% than it is about job market prospects. The gradual progress on pay growth will not have given the MPC much more confidence that the disinflation process is on track, while the firmer payrolls reading is likely to reinforce the Committee’s view that it was right to alter its priorities in the latest meeting. Further interest rate cuts should be expected, but the pace remains the big question. No change to interest rates at the MPC’s September meeting looks almost certain, while a skipped cut at the November meeting is a distinct possibility.”

07 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

House prices rise as the impact of stamp duty change fades

• The housing market looks to have moved through a soft patch following the change to stamp duty thresholds, with the Halifax house price gauge showing that prices continued to rise in July. Following a small rise in June, July saw the largest pick up since the start of the year.
• Only a relatively modest improvement in the housing market is expected over the second half of this year, as affordability remains stretched despite falling interest rates. The outlook for housebuilding is mixed, with some of the effects of planning reform offset by high construction costs and continued skills shortages. 

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices continued to pick up in July, rising by 0.4% on the month - the most significant monthly gain seen since January and an improvement on the 0.1% recorded in June. Looking back over the last twelve months, the picture remains one of modest gains with prices 2.4% higher, although that’s slightly lower than the 2.7% annual growth seen in June. 

 “The housing market is pulling out of the weak patch that followed immediately after April’s change in stamp duty thresholds. With some buyers rushing through transactions to beat the deadline at the end of March, housing transactions had fallen sharply in April. But since then, activity has been picking back up with signs that momentum will continue to build. By June, mortgage approvals were back to around pre-pandemic levels, with interest rates on new mortgages lower than in the first quarter of the year, reflecting the growing expectation from the financial markets for further interest rate cuts.  

 “While there are signs that the housing market is starting to pick up, a relatively modest improvement is expected in the second half of the year. On the one hand, further falls in interest rates appear likely, with the Bank of England expected to cut at its August meeting, and any rise in the unemployment rate over the coming year likely to be quite small. However, on the other hand, housing remains expensive with affordability looking stretched, despite the improvements seen since the pandemic. The outlook for housebuilding is similarly mixed, as the positive effects of planning reforms are counter-balanced by elevated construction costs and labour market shortages.”

06 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Construction PMI weakness should be viewed with caution, but challenges remain

• Having been gradually trending upwards over the last few months, the construction Purchasing Managers’ Index (PMI) fell back substantially in July, recording the sharpest contraction in more than five years. The weakness was broad based, but the big change on the month was driven by a marked decline in housebuilding.
• Some of the weakness in the PMIs should be taken with a healthy pinch of salt, but there is no doubt the economy has lost momentum and the outlook remains challenging. Combined US tariffs, a government that is tightening its belt and some households still facing the prospect of higher mortgage rates will all weigh on growth across the rest of the year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “The construction PMI suggested a sharp contraction in activity in July as the PMI fell to 44.3, down substantially from 48.8 in June. Having edged up over recent months, today’s fall in the PMI points to the sharpest pace of contraction in the construction sector in more than five years. The weakness in the sector was broad based with all three sub-sectors – residential, commercial, and civil engineering – all suggesting activity pared back, but the month-to-month change was most notable in housebuilding, which reported a fresh drag on the month.   

“Official estimates of construction output, which have increased across the year-to-date, don’t tally with the weak PMI readings seen so far across the course of 2025. What looks to be a string of pessimistic PMI readings should be taken with a pinch of salt, as they appear to reflect the shift in business sentiment following the changes in employer National Insurance Contributions (NICs) and the international trading environment. However, the sector will still face a challenging outlook. Uncertainty will linger, leading to the delay or cancellation of some construction projects, and businesses will continue to face a difficult operating environment as labour costs remain high due to ongoing labour shortages, as well as higher NICs and National Living Wage. The outlook for housebuilding in particular is mixed as the effects of planning reforms are counter-balanced by elevated construction costs and labour market shortages

“Even if business surveys are overall too pessimistic, it is clear the UK economy lost momentum in the middle of 2025, and growth can be expected to be muted for the rest of this year and into next. Despite the recent trade agreement, higher US tariffs will leave the UK with reduced access to a key export market, while domestic demand will be restrained by ongoing fiscal tightening and some mortgagors reaching the end of fixed terms and re-financing onto higher rates.”

05 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

July’s PMIs suggest growth remains sluggish

• July's final UK services Purchasing Managers’ Index (PMI) pointed to a slower pace of activity growth, alongside a fall in new orders and further job shedding. While the survey's outturns should be interpreted with caution, this reinforces that the momentum in the economy is sluggish and is likely to remain so.
• The services survey also reported a slight rise in selling price inflation, as businesses continued to pass on the impact of high labour costs. But the Monetary Policy Committee (MPC) will almost certainly cut Bank Rate later this week, and we expect the Committee to signal that its ‘gradual and careful’ approach to loosening policy remains appropriate.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “July's final S&P Global survey pointed to a more modest pace of services activity growth, with the sector's PMI falling to 51.8, down from 52.8 in June. Alongside the lower PMI, survey respondents also noted steeper declines in new orders and headcount, amid reports of higher payroll costs weighing on domestic economic conditions and elevated geopolitical uncertainty resulting in the delaying of investment decisions. Although July's manufacturing survey reported a shallower fall in output than in June, the weaker services outturn meant the composite PMI fell to 51.5 in July, down from 52.0 a month earlier.

“The survey's results can be erratic, and the composite PMI has been a relatively poor predictor of official output growth in recent years. In part, this is because the survey typically does a better job of reflecting changes in business confidence rather than genuine changes in economic activity, but it also reflects the degree of volatility in sectors that aren't part of the survey. However, beyond this noise, the underlying pace of growth appears sluggish and is expected to remain that way.

“The services survey also reported a slight pickup in output price inflation in July, as businesses sought to pass on the impact of higher labour costs, although a 25bps rate cut at the MPC's meeting later this week is almost certain. With the MPC balancing signs of fragility in the labour market against evidence of lingering inflationary pressure, the Committee will likely signal that further gradual interest rate cuts remain appropriate.”

01 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

House prices recover slightly in July

• House prices picked up in July, partly reflecting a bounce back after June’s fall. Looking past the month-to-month volatility, house prices have increased modestly over the past year.
• The housing market distortions from April’s change in stamp duty thresholds are fading and the market looks to be pulling out of a temporary soft patch. But housing market performance will be modest over the second half of this year as falling interest rates are set against continued affordability challenges.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices picked up by 0.6% in July according to the Nationwide House Price index, offering some recovery following the 0.9% fall in June. House prices can be volatile from month-to-month, but compared to the previous year they increased by 2.4% in July, a slight rise from 2.1% in June. 

 “The housing market appears to be pulling out of a temporary soft patch following April’s change in stamp duty thresholds. Transactions had fallen sharply in April as some purchases were rushed through to beat the deadline. Since then, activity has started to recover and with mortgage approvals in June rising to return to approximately pre-pandemic levels, this trend is expected to continue. 

“The housing market will see a modest improvement through the latter half of this year. Interest rates look set to fall back slowly and unemployment is expected to remain low, supporting demand. However, while housing affordability has improved since the pandemic, it remains stretched, and the outlook for housebuilding is mixed as the positive effects of planning reforms are counter-balanced by elevated construction costs and labour market shortages.”

01 August 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Manufacturing PMI points to a slightly shallowed decline in July

• The UK manufacturing Purchasing Managers’ Index (PMI) pointed to a slightly less severe contraction in activity in July. The tenuous link between official data and the S&P Global survey means it's difficult to gauge whether the manufacturing survey's modest improvements in recent months will translate into higher official activity.
• Input cost pressures remained stable in July, and businesses reflected this in selling prices. As with output, the link between the survey's results and official data for core goods inflation should be taken with a pinch of salt. However, should core goods price inflation remain relatively benign, this would reinforce the likelihood of the Monetary Policy Committee (MPC) continuing to cut interest rates in H2 2025 and into 2026.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “July's final S&P Global manufacturing survey signalled a slightly shallower decline in activity, with the PMI rising to a six-month high of 48.0, up from 47.7 in June. The modest pickup in the PMI reflected a far less severe decline in production, while business optimism also continued to rebound. However, market conditions remained challenging, with survey respondents reporting more substantial reductions in headcount and an accelerated contraction in new orders.

 “It's difficult to take a clean steer from these figures given the relatively weak mapping from S&P Global manufacturing PMI results to the Office for National Statistics' (ONS) output data in recent years. Moreover, the PMI results can be heavily affected by swings in business sentiment. It's therefore difficult to gauge whether the slight uptick in today's PMI reading will translate into improvements in official manufacturing activity outturns.

 “Despite higher shipping and supplier costs, survey respondents reported that input cost inflation remained relatively stable in July, and manufacturers reflected this in selling prices. As with output, the relationship between the survey results and the official data for core goods inflation can be questionable, but these findings are consistent with the view that core goods price inflation is likely to remain relatively benign. This is one piece of the puzzle underpinning the EY ITEM Club’s forecast that the MPC will continue to cut interest rates through the rest of this year and into next.”

31 July 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

BoE Preview: Another cut expected in August

• The Bank of England will likely cut Bank Rate by 25bps to 4.00% at its August meeting. But we doubt this will be unanimous, with two hawkish Monetary Policy Committee (MPC) members expected to favour no change.
• The MPC will probably indicate it remains confident that disinflation remains on track, but that it’s less concerned about the jobs market than it was at its previous meeting
• As interest rates start to approach neutral, the big question at this meeting is whether the Bank of England offers any updated guidance on how far it intends to lower Bank Rate

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “At its June meeting, the MPC was clear around its intention to reduce interest rates further, and most of the Committee will likely have seen enough since to deliver another cut at its August meeting. While upward revisions to official estimates of payrolled employees will have eased some concerns around job market prospects, the labour market has still weakened and pay growth has cooled more quickly than the Bank of England’s May forecast.

“However, signs of lingering price pressures will mean the Committee remains cautious, with two of the hawkish MPC members expected to favour no change. Inflation has risen by more than the Bank of England expected three months ago. The increase in food prices is particularly important to the MPC as it feeds through to households’ inflation expectations, one of the Committee’s key gauges around the risk of inflation persistence.”

Gradual and careful approach expected to continue

“The MPC has appeared more worried about cutting rates too quickly rather than too slowly. This isn’t expected to change, and signs that some inflationary pressures remain will likely prompt the MPC to maintain its guidance that further cuts in Bank Rate will be ‘gradual and careful’. While this is not a promise to continue to cut interest rates once per quarter, it seems likely that this trend will continue going forward.

“This is likely to be reflected in the Bank of England’s updated projections, which should show inflation settling around 2% in a couple of years’ time, based on interest rates falling back to around 3.5% early next year.”

Shifting into neutral?

“With interest rates reduced to 4%, attention will be focused on any new guidance around how far the MPC thinks that interest rates could be cut. At the press conference after its February meeting, the Bank of England set out that interest rates could reach a neutral setting once they’ve hit a 2-4% range. While the August meeting is probably too early for the Committee to break from its long-held ‘gradual and careful’ messaging, there will be a sharp focus on any potential new indications around how low interest rates could fall and when a change in guidance may take place.”

25 July 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

June rebound in retail sales masks challenging backdrop

• June saw a rebound in UK retail activity after May's decline. Across the second quarter as a whole growth was modest, with some signs of weak discretionary spending. However, some data issues mean quarterly readings should be taken with a pinch of salt.
• The recent trend of moderate performance in the retail sector will likely continue. On the one hand, consumer sentiment appears slightly less cautious, but pay growth is slowing, fiscal policy is tightening, and some households are still feeling the effects of past interest rate rises.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Retail sales picked up by 0.9% in June, having fallen by 2.8% in May. Food stores and fuel sales saw increases of 0.7% and 2.8% respectively on the month. The Office for National Statistics (ONS) suggested that some retailers reported increased demand in response to the high temperatures and dry weather. Elsewhere though, performance was more muted, with non-food store sales increasing by 0.2%.

“From month-to-month, retail sales data tends to be noisy. Over the second quarter as a whole, retail performance was soft with sales increasing by 0.2%. The weakness was most marked in the more discretionary part of the retail sector, with non-food stores seeing sales decline by 0.2% compared to Q1. However, continued issues with the ONS's seasonal adjustment of the data make it difficult to interpret moves even at the quarterly frequency.

“Looking back over the last twelve months, the retail sector has seen a relatively modest performance, which is expected to continue through the rest of the year and into next. There are signs that consumers are becoming slightly more confident, but the retail sector will still have to contend with the effects of slowing wage growth, ongoing fiscal tightening, and some mortgagors still having to refinance onto higher interest rates.”