When, a few days ago, detailed official figures were published for the economy’s performance last year — the national accounts — there was not too much to cheer about. They confirmed that the economy barely registered a pulse in the second half of 2025, with growth of just 0.1 per cent in both the third and fourth quarters.
There was, it is true, a slight upward revision of growth for the whole year, from 1.3 to 1.4 per cent, and a rise in gross domestic product (GDP) per head of 1.1 per cent, after zero growth in 2024.
Otherwise, however, it was thin gruel. The services sector, which dominates the UK economy, showed no growth in the October-December quarter, while construction output fell by 2 per cent, dragged down by a decline in private housebuilding — taking us further away from the government’s target of 1.5 million additional homes during this parliament.
Consumer spending, household consumption, rose by only a downwardly revised 0.1 per cent in the final three months of last year, and just 0.8 per cent in 2025, undershooting GDP growth. We used to worry about consumer spending rising too fast, but not now.
Another important negative was business investment, which fell by 2.5 per cent in the final quarter, though rose by 4.3 per cent overall last year. We need more business investment, of course.
So, the economy limped to the end of last year with barely any growth. There was, however, an obvious explanation. The budget was very late, November 26, and was preceded by an enormous amount of economic uncertainty, with months of speculation in the run-up to it.
The budget was not as scary as feared, the additional tax increases, mainly aimed at personal taxpayers, deferred until later. There was thus a sigh of relief from many businesses, and a recovery in confidence revealed by business surveys. After a weak end to last year, the economy appeared set fair for a reasonable start to 2026. GDP was unlikely to follow the previous quarter’s 0.1 per cent rise with anything as strong as its 0.7 per cent increase in last year’s first quarter, but it was on course to keep its head well above water.
Instead of which, we have a new and greater uncertainty, which reminds me rather of six years ago, and the outbreak of Covid. Then, growth was snuffed out late in 2020’s first quarter, as restrictions were imposed and lockdown commenced — and by enough to ensure that GDP fell by 2.7 per cent in that quarter — almost as much as what was then the record quarterly fall of 2.8 per cent, during the three-day week of early 1974.
Both were blown away by the 19.9 per cent plunge in GDP in the April-June quarter of 2020, the economy hit hard by that first Covid lockdown.
This crisis is not shaping up to be anything remotely as serious (and I hope that is not famous last words), but a neat illustration of the impact of the Middle East conflict has been provided by the ICAEW (the Institute of Chartered Accounts in England and Wales) in its latest business confidence survey.
Its confidence monitor, which recorded a reading of -11.1, heavily negative, in the fourth quarter of last year, had recovered to +2.8 in readings taken from firms in the run-up to the war — before falling back to -1.1, dragged down by submissions taken when the missiles started flying.
The overall confidence reading for the quarter was better than late 2025, but that may be small comfort.
Other business confidence surveys range from the gloomiest ever (Institute of Directors) to 11 points up in March, which was what Lloyds Bank’s business barometer recorded. In that barometer, businesses were surveyed in the first half of the month, perhaps before the consequences of the war had started to feed through to the small firms in the survey.
Anyway, now that the first-quarter bounce in the economy has been dealt a significant blow by the Iran war, perspectives have changed. Rather than a weak end to 2025 being a prelude to a strong first half of the year in 2026, as in 2024 and 2025, it now looks as if the UK economy was limping into the energy crisis generated by Donald Trump’s war.
Are there any crumbs of comfort? Economists have been pinpointing one number: the saving ratio. Could this help provide some resilience in the face of the energy storm?
The saving ratio, the proportion of disposable income saved by households, has been a story in itself in recent years. In the second quarter of 2020, it rose to an all-time high of 27.5 per cent, easily a record, before falling back and then rising again to 21.8 per cent in early 2021, during what turned out to be the last Covid lockdown.
The great debate then was how quickly all these involuntary savings — so-called because, during the pandemic, people could not spend on the things they normally do — would be spent. To find the answer to that, it is necessary to split saving into its two components. One is pension saving, which averages between 4 and 6 per cent of income, but does not vary hugely because people have long-term pension arrangements.
The other is non-pension, or discretionary, saving, which is what people put away for various other reasons — among them the precautionary motive of putting money away for unforeseen events.
In the final quarter of last year, the overall saving ratio was 9.9 per cent, up by 0.8 percentage points on the previous quarter. Pension saving accounted for 4.2 percentage points of the ratio, non-pension 5.7. People saved more rather than spending.
In 2022, in response to the energy shock triggered by the Russian invasion of Ukraine, and even with extensive and expensive government support, people ran down some of their savings so they could get by. Non-pension savings turned negative for two successive quarters that year and remained very low until early 2024.
The economy did not succumb to outright recession in this period, and we would give our eye teeth for a significant fraction of 2022’s 5.1 per cent growth rate, though there was a “technical” recession of two successive quarters of falling GDP in the second half of 2023. Savings provided the safety valve during the Putin energy shock; could they do so again during this Trump energy shock?
Things are different now, though not in an entirely negative way. Then, there was an appetite for a return to pre-pandemic normality, and people were prepared to spend to do so. Now, the worry is of another bout of food and energy inflation, and (rightly) less likelihood of huge government support to see people through.
Consumer confidence plunged last month, according to an index from YouGov and the Centre for Economics and Business Research, but remains well above its levels in 2022 and 2020. Its latest reading of 105.8 compares with troughs of 94.7 in 2022 and 92.7 in 2020.
Things could go in several ways. The best way would be if lower savings, for now, supported spending in general and the economy. But people could decide that, with a one-man wrecking ball in the White House, and other dangers, this is a time for more precautionary saving, not less. Alternatively, any rundown of savings could be used entirely for spending on essentials, leaving many retailers and other consumer businesses high and dry. Either way, we are in for an interesting, and potentially worrying, few months.
PS
On that note, we all need cheering up this Easter weekend. I could offer you jokes, and my regulars are still sending in material, but I may need them later. So, it is time to bring some surprisingly optimistic news on my skip index.
The index, as some of you may know, is based on the number of builders’ skips in my street, and I first started to talk and write about it some 30 years ago. I was told recently that at one time it was monitored by the Treasury as an additional informal economic indicator.
The way it works is that no skips means no growth, or recession. Two indicates that the economy is expanding in line with “trend” growth, which used to be higher than now. Four skips is an unsustainable boom.
I have not provided an update for a while, so here goes. There are, very encouragingly, two skips in my street, defying the gloom and uncertainty. It is possible this is a lagging indicator, and that they were ordered before the Iran war. But somebody told me the other day that demand for skips nationally is very strong, and that they are in short supply. All of which suggests we should not yet despair and even, in proper wartime spirit, keep smiling through.
david.smith@sunday-times.co.uk