20 Feb 2025
The Bank of England’s (BoE) Monetary Policy Committee (MPC) voted unanimously in February to cut the Base Rate by 0.25% to 4.5%, with two members advocating for a larger 0.5% cut. Despite inflation remaining a threat, this shift to a more dovish stance highlights the concerns they have over the health of the UK economy.
Equity markets reacted positively, anticipating further cuts, but investor focus turned to the BoE’s downgraded growth forecast for 2025 (from 1.5% to 0.75%) and an upward revision of inflation, which is expected to peak at 3.8% before returning to target in 2027. The bank also predicted weaker business investment, rising unemployment (potentially reaching 5%), and a fragile economic outlook, raising fears of stagflation. A recession may be avoided, but recent GDP data has shown a mere 0.1% growth in Q4 2024 and paints a pretty bleak picture of the UK’s economic trajectory.
With all this doom and gloom, why would anyone invest in UK plc? There may be just one word for it – infrastructure! The new Labour government is putting growth at the heart of its agenda, with a bold commitment to revitalising the UK’s core infrastructure. By fast-tracking the planning process for 150 major projects, they’re accelerating much-needed developments and upgrades. A key pillar of this strategy is Keir Starmer’s pledge to decarbonise the economy, targeting at least 95% clean power by 2030. This signals a major wave of investment in energy transition, positioning the UK as a leader in the global shift towards net zero.
Where do we stand when it comes to the AI revolution? Keir Starmer has pledged to make Britain ‘one of the great AI superpowers’, announcing a raft of proposals which included new AI ‘growth zones’, with the construction of key infrastructure, such as data centres, at the forefront. According to the International Energy Agency, global data centre electricity consumption is set to rival Japan’s total power usage within the next two years. In response, the UK government has announced a historic expansion of nuclear power across England and Wales and is hoping to partner with tech companies to develop small modular reactors (SMRs). These advanced nuclear solutions will help meet the soaring energy demands of AI-driven data centres, ensuring a stable and sustainable power supply for Britain’s digital future. The plans are in their infancy though, and the reactors still face significant hurdles before construction can begin, not least the fact that no commercial SMRs are yet operational across the world.
With the extensive additional load, could the national grid infrastructure cope with demand? We’re already in dire need of energy infrastructure upgrades and to achieve this, John Pettigrew, chief executive of the National Grid, has estimated that Britain needs to roll out five times as many pylons and underground lines in the next five years than has been achieved in the past 30 years and the electricity hungry AI data centres would only add to this burden.
The path to cleaner energy in the UK remains unclear. The government is struggling with balancing the commitment to making the UK greener and the reality of being able to meet the UK’s growing energy requirements, particularly if the ambitious IA development plans come into effect. There is talk that the government may abandon its clean energy pledge just months after it being a pivotal part of the election campaign, but one thing we do know for sure is that investment in energy production and distribution is going to reach an astronomically high level over the next few years. If we’re going to compete on the global stage, Britain needs reliable sources of cheap energy, and the government and corporate world are fully aware of that.
What about the UK’s water industry? In December 2024, Ofwat (the Water Services Regulation Authority) approved £104 billion of total expenditure by water companies in England and Wales for the following five years to 2030; the largest investment ever made by the water industry, and by far the most extensive programme in Europe which could generate 30,000 new jobs.
How are markets reacting? Many companies involved in the delivery of these huge infrastructure projects are still trading at highly attractive valuations, and the potential investment opportunity generated by the UK’s imminent infrastructure boom seems to be flying under the radar. From energy and water to transportation and beyond, companies are reporting strong pipelines of confirmed orders for large-scale projects - and this is just the beginning. As both the pace and the scale of development accelerate, these companies are set to benefit from long-term, sustainable revenue streams.
Infrastructure investments stand out for their resilience over economic cycles, offering investors predictable cash flows. With revenues often secured through long-term contracts with creditworthy entities like government bodies, they provide both stability and reliability—making them an attractive cornerstone for an investment portfolio. Infrastructure output is forecast to rise by 18% over the next five years, driven by strong growth in the electricity sub-sector so, regardless of how quickly AI and clean energy transitions unfold, one thing is certain - Britain is on the cusp of one of its biggest infrastructure spending sprees in decades and this transformation represents a significant opportunity for investors.
Andrew Robinson, Senior Investment Analyst
Katie Sykes, Client Engagement & Marketing Manager
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