Leading Indicators | Spring Statement 2025: Chancellor Rachel Reeves’ fiscal balancing act
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Spring Statement preview
Chancellor Rachel Reeves’ will present her fiscal update on March 26th amid geopolitical tensions, tariff threats, and a stagnating UK economy. The market expects her to tighten fiscal policy by £10bn (0.3% of GDP). However, with the UK government under pressure to further increase spending on defence, fiscal policy may ultimately end up looser, which creates some upside for GDP, interest rates, and gilt yields in the years ahead.
A key challenge is addressing the OBR’s potential assessment that, before new measures, her fiscal mandate falls short by £1.6bn. Capital Economics predicts Reeves will restore the £9.9bn fiscal headroom from October, likely through cuts to welfare and non-defence spending rather than tax hikes, which could reduce GDP growth by 0.1% in 2026/27. More crucial is how she funds rising defence commitments, aiming to increase spending from 2.5% of GDP in 2027 to 3.0% by 2033, requiring £18bn annually by 2030. Matching US and German levels at 3.5% would require £35bn.
UK CRE Outlook upgraded
The latest IPF Consensus Forecast signals a more optimistic outlook for commercial property performance in 2025 and 2026. The total return forecast for UK All Property in 2025 improved by 20bps to +8.8% in February, driven by stronger capital value growth and a modest uplift in rental value expectations. Capital values are now expected to increase by +3.7% this year, 20bps higher than the previous forecast in November, while rental values are forecast to grow by +2.8%. At the sector level, Industrial is expected to achieve the strongest capital growth in 2025 at +5.1% and is forecast to outperform over the next four years. Between 2025-2029, both Retail Warehouse and Industrial are anticipated to deliver the strongest total returns, averaging +8.6% and +8.3% per annum, respectively, followed by Shopping Centres (+8.0% p.a), Standard Retail (+7.2%) and Offices (+6.6%). The lack of volatility in recent surveys indicates a greater level of conviction towards future return profiles.
A cooling Labour market
The UK job market is showing signs of cooling, as a recent report from the Recruitment & Employment Confederation (REC) and KPMG highlights a slowdown in hiring activity. In February, wages for new hires grew at their slowest pace in four years, reflecting businesses' concerns over rising labour costs. The planned £25bn increase in employers' National Insurance contributions, combined with a 6.7% minimum wage rise set for April, is expected to prompt companies to scale back on hiring and spending. This aligns with the Bank of England's (BoE) predictions of slower private-sector wage growth, which is forecast to drop significantly to 3.75% by late 2025, down from over 6% at the end of last year. While inflation is expected to edge up slightly, the cooling job market reinforces the outlook that interest rates may still trend downwards this year.
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