Since it’s now the ninth week of January and the weather forecast is a coin toss between rain and wind or snow and ice, I thought I’d start this week with some positive news!

First, now that November’s Budget and all its associated uncertainty is behind us, consumers have seemed more willing to open their wallets. That’s crucially important because about two-thirds of the UK economy is based on consumer spending. Indeed, retail sales volumes rose by 0.4% in December. Admittedly, sales were still down in the all-important Golden Quarter, highlighting the damage all the speculation about the Chancellor’s plans had. But, a pick-up in December is encouraging and, compared to the previous year, retail sales actually grew by 3% in Q4.

Consumer confidence also increased in both December and January. In fact, this month consumer confidence rose to its highest level since August 2024, providing more evidence that households are feeling better now that the Autumn Budget has passed and it didn’t contain any major imminent tax rises. There was a big rise in confidence around consumers’ own personal finances, taking this measure to its highest level in 17 months. Major purchase intentions were also the strongest since January 2022. Combined with the increase in retail sales, these are promising signs that consumers are more confident and will start to spend more, which is one of the key economic questions of this year.

It wasn’t just consumers feeling better post-Budget. Business sentiment also jumped in January. The composite PMI reached its highest level in almost four years. If you don’t follow the PMIs closely, I get it. But, they’re probably the most followed set of business surveys. They track output, new orders, prices and employment in the private sector and have the advantage of being published early in the month, giving us a first look at how the economy is performing. January’s big uptick therefore suggests that the UK economy rebounded strongly at the start of the year after a weak end to 2025.

Admittedly, a decent portion of this improvement is probably just activity that should’ve happened last year, but was postponed because of the Budget. Once we smooth growth out over Q4 and Q1, the picture is probably one of ok growth; nothing spectacular, but worries about recession are probably overdone.

However, there are two areas of concern. First is the labour market. Despite the rise in the PMI’s output index, employment balances continued to fall and are pointing to shrinking private sector employment. Indeed, the number of people on company payrolls dropped again in December. Much of this is probably due to the surge in employment costs, which this line from the PMI release supports: “Survey respondents overwhelmingly linked rising input costs to elevated wage pressures.”

This leads to the second area of concern, which is cost pressures. Even though there are some tentative signs demand is recovering, businesses are facing another wave of cost increases, not least from another National Minimum Wage hike in April. That adds pressure on firms to defend margins by continuing to raise prices, which would explain why surveys show price pressures remain strong, despite the weak labour market and tepid growth. Businesses that lack pricing power or that are unable to cut costs further are especially vulnerable.

For the Bank of England, the combination of a weak labour market and sticky inflation is tricky. The employment numbers mean there’ll be more rate cuts, but signs of a pick-up in the UK economy and stubborn inflation mean there won’t be many of them − and we’ll probably have to wait until April. But, more on that next week!

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