Alpesh Paleja, Lead Economist at the CBI, specialises in the UK economy and oversees its economic forecasts. In a conversation with Asian Voice, he shares insights on the UK’s economic landscape, the UK-India Free Trade Agreement (FTA), and business confidence in the new fiscal year.
1. How would you describe the current state of the UK economy? What are the biggest challenges facing businesses in 2025?
A range of data – including the CBI’s own surveys – suggest that economic momentum remains weak. A few things are behind that: we’ve had a long period of high inflation and cost pressures after the COVID pandemic, which has hit both household spending and business’ margins. There was also continued uncertainty last year ahead of the general election and the government’s first Budget, which meant that many businesses kept new projects and investment on hold. Firms have since been dealing with additional cost pressures that have arisen from the Budget: principally the rise in employer National Insurance Contributions and a big increase in the National Living Wage.
On top of this, global economic and geopolitical risks are growing, particularly around numerous tariff measures implemented or coming down the track from the US. The swathe of headwinds and uncertainty really underscores how important it is to firm up the foundations for growth at home.
2. Do you think that UK- India FTA has any hope of being finalised under the Labour government after all the delay? Are there any potential hurdles that could delay or complicate the deal?
A Free Trade Agreement with India would be a great opportunity for the UK, given that India is set to remain one of the fastest growing major economies in the world. The strength of its consumer market means that there is considerable demand potential for some of the UK business community.
The reality is that trade deals can often take a while to finalise – there tend to be lots of minutiae and fine details that need ironing out, to ensure that all parties benefit accordingly. And a UK-India FTA would also need to be considered in the broader context of the UK’s trade and international strategy. Notably, the Trade and Co-operation agreement with the EU is set to be renegotiated next year, which provides an opportunity to drive economic growth and position the UK as a leader on the world stage
3. What are the key economic trends shaping the UK’s financial landscape as a new fiscal year begins? What are some policies that are set to have an effect on the economy of the country and how do you see business sentiment shifting in response to government policies?
Business sentiment has been hit by the big rise in employment costs, and our members tell us that they’re reappraising some of their operations in response – looking at hiring, pay awards, pricing and investment plans. Our own business surveys show a weakening in hiring intentions, and some resilience in pricing intentions, at a time when economic growth was already weak. That’s set to remain a key theme over the coming months.
But it’s important to remember that we could also see more tailwinds to growth this year. Consumer fundamentals are firmer, with wage growth outpacing inflation and interest rates having come down from previous peaks. This could translate into more household spending, which would have positive spillovers to investment. The government’s Spending Review in the summer offers a golden opportunity to consolidate this near-term momentum into longer-term growth ambition.
4. What is the current outlook for business confidence and how can businesses leverage government policies or financial incentives to drive investment?
It’s clear that businesses are still grappling with numerous headwinds, while contending with a challenging operating environment. But given some glimmers of hope for near-term momentum, we shouldn’t rule out a modest improvement in business confidence.
The Spending Review in a few months can go a long way towards catalysing investment. Setting an ambitious goal for R&D spending, making it easier to invest in skills and taking measures to reduce the regulatory burden on business would be encouraging moves that would show the government understood what business needs to see from them.
Business investment could also benefit from some near-term tailwinds. For example, it’s likely that the Bank of England will lower interest rates further, which should give some further support to capital spending.
5. Which industries or sectors stand to gain the most from this agreement, and are there any potential drawbacks?
At the moment, India accounts for a relatively small proportion of the UK’s exports, but it is a key market for several specific sectors – such as industrial metals and machinery, tourism and some business services. It’s important to note that many of these areas are already a key competitive advantage for the UK, and are integral to its standing in the global economy.
