The first half of 2025 has proven to be a challenging period for the UK economy, marked by a significant decline in deal activity and mounting pressures on public finances, according to recent reports from KPMG.
These developments reflect a broader economic environment fraught with uncertainty, driven by global trade disruptions, rising costs, and cautious business sentiment.
KPMG’s latest report on UK deal activity highlights a sharp decline in M&A transactions during the first six months of 2025.
The report notes that both the volume and value of deals have fallen significantly compared to the same period in 2024, with global uncertainties and domestic economic pressures cited as primary drivers.
Businesses are grappling with a confluence of challenges, including elevated labor costs, geopolitical tensions, and the looming threat of new trade tariffs, particularly from the United States.
These factors have dampened investor confidence, leading to a more cautious approach to deal-making.
The report points to a notable slowdown in private equity (PE) activity, with mid-market PE investments particularly hard-hit.
This follows a trend observed in previous years, where economic uncertainty has led investors to adopt a wait-and-see approach.
KPMG’s analysis suggests that sectors such as hospitality and retail, already strained by high labor costs and supply chain disruptions, have seen reduced M&A activity as businesses prioritize cost management over expansion.
Additionally, the uncertainty surrounding new trading agreements with the US and EU has further curtailed deal momentum, with many firms pausing strategic investments until clearer economic policies emerge.
Despite the downturn, KPMG remains cautiously optimistic about a potential recovery in the second half of 2025.
The report suggests that well-capitalized businesses could capitalize on lower valuations to pursue strategic acquisitions, particularly in sectors like technology and clean energy, where long-term growth prospects remain strong.
However, the pace of recovery will depend heavily on government policies, including the Modern Industrial Strategy and anticipated spending plans, which could restore confidence and stimulate investment.
Compounding the challenges in the private sector, KPMG’s commentary on the UK’s public finances paints a concerning picture.
According to Dennis Tatarkov, Senior Economist at KPMG UK, the UK’s fiscal position remains precarious, with public borrowing in the 2024/25 fiscal year significantly exceeding projections.
January 2025 saw a fiscal surplus of £15.4 billion, driven by self-assessment income tax receipts, but this figure fell well short of the Office for Budget Responsibility’s (OBR) October forecast.
Cumulative borrowing for the first ten months of the fiscal year reached £118.2 billion, surpassing the OBR’s estimate of £105.4 billion, putting the UK on track to borrow approximately £135.8 billion for the full year.
This overshoot in borrowing is attributed to persistent pressures on public spending, exacerbated by rising inflation and energy costs.
KPMG notes that revisions to past data, including a £2.1 billion downward adjustment to January’s surplus, have further strained the fiscal outlook.
These developments have raised concerns about the Chancellor’s ability to meet fiscal targets, with the OBR likely to downgrade its growth forecast in the coming months.
The combination of higher borrowing and global economic uncertainties, such as potential trade conflicts, could force the government to make difficult decisions on tax and spending policies as early as the Autumn Budget.
The dual challenges of declining deal activity and rising public borrowing underscore the delicate state of the UK economy in 2025.
Businesses face a complex environment where cost pressures, geopolitical risks, and policy uncertainties are stifling growth and investment.
Meanwhile, the government must navigate a tightening fiscal landscape, balancing the need for public investment with the imperative to maintain fiscal discipline.
KPMG’s analyses suggest that the second half of 2025 could offer opportunities for recovery, particularly if interest rate cuts materialize and global trade tensions ease.
However, businesses and policymakers alike will need to adopt proactive strategies to address these challenges.
For firms, this may involve leveraging technology and AI to enhance efficiency, while the government will need to provide clear policy signals to boost confidence and stimulate economic activity.
KPMG concluded that as the UK heads into a critical period, the interplay between private sector resilience and public sector strategy could potentially be pivotal in shaping the nation’s economic trajectory.