February 2026 Economic Updates

Kirsty McGregor: Hello, and welcome to Capitalise's Economic Update, a roundup of the key economic and market activity going on in the world at the moment. Then we're going to translate them into how it'll impact owner-managed businesses in the UK, and thankfully, to help me make sense of all of these headlines, I've got Paul Surtees joining me, CEO of Capitalise. Hello, Paul!

Paul Surtees: Hey Kirsty, how are you?

Kirsty McGregor: I'm good. Right, in this episode, what are we going to cover? We're going to start off with what's going on for businesses in the current economic and fiscal environment. We'll touch on taxes a little bit. Then we'll review what's changing from this April, to recap. And then looking ahead to the spring statement, which is actually at the beginning of March this time, and then we'll look further ahead to the budget in October, and Paul then is going to share how businesses might want to position themselves this year.

So, Paul, what are the economic indicators telling us, first of all?

Paul Surtees: So, look, three key thoughts, Kirsty. We've had two good numbers, coming through, or two big numbers coming through, employment and inflation, and that's going to give us a really big steer in terms of the Bank of England rates for the remainder of the year. I don't normally dig this deep into the employment data, but there's a lot going on that's relevant for our businesses here, so let's dig into the ONS's quarterly unemployment, which has crept up to 5.2%, so it's definitely kind of creeping up to levels we've not seen for a while. But to best summarise it, I think it's low hiring, but low firing, so reserved hiring, businesses not quite so sure about what's ahead, so they're being a little bit more tentative. But equally, they're not laying off lots of people. 75% of the available adults are in work. There's 5.2% which is unemployed, and then there's 20.8% economically inactive but able to work. And the definition of this is student, or looking after family, or home, or a long-term illness. And that number has actually come down a little bit, but by coming down, it's pushed up the number of those unemployed. What you are starting to see in the press, though, is a striking number for youth unemployment at 14%, and of course, this will become a political battleground over the weeks, months, and quarters ahead.

One of the biggest challenges from an inflation perspective has been wage growth that continues to slow. It is growing, but it is slowing. So we've got 4.2% annual growth rate, but there is a huge split between public pay rises, public sector pay rises, and private. So 7.2% rises for public. 3.4% in the private sector. So you can see the impact a lot of those pay agreements that have come from Labour over the last year or so, really taking a bite. But there's lots of variations, and that's why I want to go deep into this. So, there's a really big difference in sectors. So, hospitality and retail, we know are really challenged, but over the last 12 months, there are 120,000 fewer jobs now than there were 12 months ago.

And in terms of proprietary data on Capitalise, retail, the retail sector is the only sector that has had a fall in funding applications in capitalise over the last year or so, whereas every other sector has grown.

In terms of sectors that are growing, health and manufacturing have put 39,000 jobs on, and so they're the sectors that are thriving relative to hospitality and retail.

There's also a huge variation in region, so what's hot? Well, Northern Ireland has got the lowest unemployment, Southeast and East have got the highest employment rates, and it's also the only region where vacancies have actually dropped.

But what's cold? And this one may be surprising, London. London whilst it's got the highest wages, it also has the highest unemployment, at 7.6%. The North East, just behind, often discussed in these times, at 7%, and the West Midlands at 6.1. So, big surprise there in terms of, like, what's happening in London, and I suspect quite a lot of that is to do with the youth unemployment and graduates coming to London and similar.

We've also had inflation. It was softer at 3%, but of course, that is still somewhere over the Bank of England target. So, what's been getting cheaper? What feels easier for us to buy? Well, that's transport and fuel, food and beverages, education, so obviously VAT was put on private school, and that's falling out of the index, so, that's had quite a big impact.

What's been sticky? Hospitality, you may be feeling it. We've just talked about the squeeze, the pinch. Restaurants and hotels have increased their pricing on average by 4.1%. And the other biggie is communication, so broadband and mobile up 4.6%.

So what does this all mean for the Bank of England. Well, on the back of these numbers, slightly lower inflation and, unemployment feeling a little, a little bit more tenuous, creeping higher there, markets are predicting over an 80% cut of 0.25% in March.

The Bank of England is expecting inflation to fall back to its 2% target by spring.

This is a mechanical shift, though, and so what do I mean by that? Well, there's a big removal of energy pricing of £150 for green levees. That's going to have a big impact.

At the budget, we saw, regulated fares frozen, so that's train fares, it's prescriptions, so that's an impact on inflation. But stripping those out, maybe the inflation feels a little bit more like 2.5%, but the headline number is going to be 2%, and of course, Rachel Reeves has been on the wire saying that the government's decisions at the budget is having a big impact on lowering inflation, and we'll see the impact of that when these things roll off. But for now, it's helping. So rate expectations. The market is expecting, about 3.25%, 3.5%. Goldman Sachs thinking, targeting 3% for terminal rates, but I saw an interesting comment today. Hugh Pill, who's the chief economist at the Bank of England, had a recent trip to the Midlands, and he is deemed to be dovish in the Bank of England Monetary Policy Committee, and he basically said that interest rates was not one of the primary concerns of the businesses there. What I'm seeing, or what I'm hearing in that message, is that he would be happy to keep rates higher for longer, because it's one thing to get back to the target rate, but the job of the Bank of England is to keep it there. So, the chief economist, I think, is saying that he would like to keep rates a little bit higher for longer, and maybe those market rates are a little bit more correct than Goldman Sachs are predicting.

Kirsty McGregor: Yeah, we're impacted so much by the price of oil, aren't we? And as that changes, and then the time it… the time, like, how it takes to come through supply chains is what's affecting hospitality still now, as it's taken a little while for supplies to put the prices up, but a nervous time, but what is happening in the lending market, then? This has been quite interesting.

Paul Surtees: So I think we're kind of in a period of, of nervous growth, you know, in terms of SME and the SME space, and it's kind of reflected in GDP. I think that, that's reflected in lending. We've seen a huge increase in lending inquiry at, at Capitalise. As I mentioned already, the only sector that is not seeing an increase is retail, in terms of demand for funding. I mentioned manufacturing have a good time, you know, in terms of putting on, you know, lots of jobs. And equally, manufacturing, is the second highest, sector in terms of funding search and funding search growth. So, good times, more jobs, more funding, not so good times, less jobs, less funding, you know, kind of coming through. So, cautious growth, I would say, in terms of, like, the funding space. But in terms of what I've just discussed in rates and rates going down. Ultimately, the expectation of falling rates, it's starting to come through from lenders, and we're starting to see lower rates, we're starting to see longer rates, we're starting to see alternative lenders, come up with 5 years, 6 years, 7 years, and we're seeing more entrants, coming into the term lending space, moving up from 12 and 24 months, which is a really good sign. And this chimes well with the Tier 1 lenders, and lots of the narrative. Lloyds were in the market this week, talking about export finance and £2 billion for exporters, and matching, you know, government promises, and so there was a lot of positive messaging in terms of SME lending at the moment.

So, Kirsty, what's upcoming for SMEs? What's important? What should we think about?

Kirsty McGregor: Well, just a reminder of so many things, take a long time to trickle into, actually becoming relevant to SMEs. They're announced at a budget, or they're announced at some point, and then it can be quite a number of months. So, just a reminder, what is actually changing from this April, March-April 2026, and it's not good news, so let me rattle through them quickly. There's going to be tax rises on dividend income, there's going to be increased capital gains tax for those entrepreneurs who are exiting their companies.

There's going to be, now, for the first time ever, increased or actual charge of IHT, inheritance tax for the beneficiaries of the business owners who unfortunately die. And that includes the farmers, which you've seen massively in the press, but it's also all other businesses as well. National minimum wage and national living wage increased by about 4%, a bit more for the younger ones.

Making Tax Digital, becomes mandatory for sole traders and partnerships above £50,000 in income. That means they've got to report quarterly now to HMRC, not pay tax any quicker, but report in, which may be a cost for, their actual administration. Changes to business rates is one that's going to be kicking in with all the multiplier issues as well, and many business owners who probably already have their bills are seeing that there has been a big impact on the rates they're going to be paying for books next financial year. And don't forget the tariffs are still in a state of flux. We still don't know definitely whether they're legal, if they're going to be going ahead, if the President of the United States is going to bring in another tariff. So, we know that's affecting supply chain costs, or if you are selling to customers in the US, your pricing. Now, let's look ahead, then, to the spring statement, which is going to be at the beginning of March. We… this is only, it's not a full fiscal event, it's only a briefing. So likely to look at the economic outlook, look at what the OBR is saying. We don't expect any big tax or spending measures to be announced in March, although, you know, it has been changed in the past. But the looking ahead to autumn, which is the main budget, that should be sometime in October, I think we're probably going to expect more taxes. As much as, the Chancellor, now for two years running, has said that this will be the last time. Actually, she's changed her stance a little bit, and she's not making any promises. And, and I think that's because the predictions she made and the OBR did the forecasts for last year are likely to be different this time. The welfare bill is unlikely to come down, the tax revenues are unlikely to be as high as she would have liked. And then I think the big shift at the moment, and we saw it just in the Munich Security Conference that's happened this week, and Davos a couple of weeks ago, is that I think we are going to have to increase defence spending, probably over and above what's even been announced so far and speed it up, as we reduce our reliance on the United States. So, if the government does formalise faster defence spending. Then all these forecasts will have to be revised downwards again, and that then leaves the Chancellor with another deficit to fill come October.

So, in between that time, from now till then, Paul, last question for you. How do we think business owners should prepare for this year and into next?

Paul Surtees: I think rolling a message in from the back end of Q4 is that financial resilience really is the key growth strategy for this year. There's cautious growth, but you've got to make sure that you're resilient and you can weather any storm. So make sure that you've got robust plans and, you know, strong strategies, A, B, and C, so that you're kind of trying to at least think through some of the potential challenges. I think for everybody that can, you know, who's got access to AI and, can increase their productivity, and it really, really should, because the speed at which, it is coming is boggling my mind, for sure. I can't keep up. I'm not the smartest tool, but, for sure, I'm trying to make sure that these productivity comes into our business, so I absolutely make sure that that is a key component.

And then, finally, maximise your working capital, both internal and external. Make sure that your credit score is as strong as possible, make sure that your

Credit risk checking all of your businesses, so you don't have any bad, bad debts, and then equally, make sure that you've got the best financing structure in place to fund your business, for growth and for the year ahead.

Kirsty McGregor: Okay, well, that's our to-do list for the next few weeks, that should keep us busy. Obviously, if you need any support around funding and credit, do contact us at Capitalise, and we'll be happy to help, and we'll see where we are next time we chat again in April, Paul.

Paul Surtees: Thanks, Kirsty.

Kirsty McGregor: See you then!