Tax rises in the budget have sapped consumer confidence and will lead to sharp reductions in private sector pay growth next year, two separate reports have said.
In a blow to Rachel Reeves’s efforts to boost growth, a survey by S&P Global Market Intelligence showed that consumer confidence dropped this month after households said the outlook for the economy had deteriorated and the prospects for their own finances had worsened.
The consultancy said the government had failed to build on the underlying improvement in consumer sentiment seen in the months before and after the general election.
Goldman Sachs said in a separate report that the increase in employer national insurance contributions (NICs) announced in the budget, raising £20bn for the Treasury, would force employers to pass on some of the cost in lower wage increases.
Analysts at the investment bank said they believed wages growth would slow as a result.
“We expect consumer spending growth to moderate in the second half of next year as real disposable income growth falls back,” they said. “This partly reflects slowing real wage growth; we expect private sector pay increases to cool, partly because of the employer NICs increase being passed on to consumers.”
S&P Global Market Intelligence said that since a high point in July, consumers had spent the rest of the summer and autumn more buoyant about their finances over the next 12 months than in the period before the Covid pandemic.
However, the survey in November found the “ongoing pressure on household finances has resulted in squeezed spending, higher debt and lower savings”.
The consumer sentiment index – a mix of surveys tracking consumer financial wellbeing, the jobs market, household spending, savings and debt – fell from 47.3 in October to 46.9 in November, where a number below 50 indicates contraction.
Chris Williamson, the chief business economist at S&P Global Market Intelligence, said: “A key concern going forward will be the labour market. Rising incomes and busier workplaces have underpinned much of the improvement in consumer sentiment over the past two years, but job security is showing signs of waning.
“Any intensification of job worries, spurred perhaps the recent measures announced in the budget, including higher employer national insurance contributions, could result in a further loss of consumer confidence. This would likely in turn hit consumer spending and economic growth.”
The Goldman analysts said they feared mortgage rates would drift higher as the Bank of England signalled high interest rates would be in place for a longer period.
Before the slowdown next year, the UK will enjoy a mini boom after Reeves gave a boost to Whitehall budgets and increased public sector pay, Goldman said.
Policymakers at the Bank of England have cut the cost of borrowing twice this year, to 4.75%, but a further reduction in interest rates next month is no longer expected, delaying further cuts until the new year.
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Millions of mortgage payers due to refinance their loans in 2025 are hoping to benefit from lower borrowing costs.
Williamson said: “The tough climate facing households has prompted a growing belief that interest rates will fall again, which should help alleviate some of the financial pressure on borrowers. However, the fact that confidence fell in November despite the Bank of England cutting interest rates suggests lower borrowing costs alone may be insufficient to turn the tide and lift sentiment.”
Trade tensions under the Trump administration will also hurt the UK economy next year, even if Britain avoids tough new tariffs, the Goldman analysts said.
“Although our base case is that the US only imposes very limited tariffs on the UK, the threat of more significant tariffs is likely to generate uncertainty in the near term, which should weigh on demand. And we expect that uncertainty around tariffs will notably reduce euro area growth, which is likely to generate spillovers to the UK.”
The Centre for Economics and Business Research, a consultancy, has calculated that if the US imposes a 20% tariff on all imports and a 60% tariff on China, it could reduce the UK economy by 0.9% by the end of the Trump administration, even if other countries do not retaliate.
The firm said Trump’s re-election could reshape global dynamics, “particularly in trade, energy, and environmental policy”.
There is also a risk that energy prices are pushed higher, leading to higher bills, if retaliatory action is taken against US tariffs.