Have we made it too easy for people not to work?
Britain’s fragile economic foundations are facing renewed scrutiny as Andrew Bailey, governor of the Bank of England, warned of an “acute challenge” created by weak growth and a shrinking labour force. His remarks at the Federal Reserve’s annual conference in Wyoming underscore a structural problem that could ripple through the housing and mortgage sectors.
Mr Bailey said that an ageing population and a rise in younger people leaving the workforce due to illness were undermining participation. “Ageing is not going to turn around in the foreseeable future,” he told delegates, emphasising that lifting productivity had become even more essential.
Official figures show that 21 per cent of working-age Britons were economically inactive in the second quarter of 2025. Although down from a peak of 22.2 per cent last year, the rate remains above the 20.3 per cent recorded before the pandemic, leaving the UK at the “bottom of the league table” compared with other advanced economies.
This trend, Bailey noted, cannot be explained away by data limitations, such as survey response rates. “Data caveats aside, this is a pretty sad story for the UK,” he said.
Implications for mortgages
For mortgage professionals, the warnings are significant. A smaller, less active workforce limits household income growth, making it harder for borrowers to meet affordability thresholds. Rising economic inactivity also constrains housing demand in certain regions, as fewer households transition into ownership.
UK Labour force participation (15+)
At the same time, the persistence of high inflation—3.8 per cent in July, the highest among G7 countries—creates pressure on the Bank’s monetary stance. While Mr Bailey did not set out a policy outlook in Wyoming, the spectre of stubborn inflation combined with weak participation suggests that interest rates may stay elevated for longer than borrowers and lenders would prefer.
That combination—muted wage growth but elevated borrowing costs—could further test affordability in the mortgage market. Lenders are already facing challenges in stress-testing applicants, while borrowers on variable rates remain particularly exposed.
The Labour government has pledged to improve labour participation and stimulate growth, but its decision earlier this year to reject disability benefit reforms has divided opinion among economists. The House of Lords Economic Affairs Committee has separately called for urgent reform to the health-related benefits system, warning that rising welfare dependency is not sustainable.
For the mortgage sector, the connection is direct: a larger pool of inactive individuals means fewer prospective borrowers entering the market, while stretched public finances leave little room for tax or spending measures that could support housing.
Bailey’s remarks, delivered alongside Christine Lagarde of the European Central Bank and Kazuo Ueda of the Bank of Japan, reinforce the message that Britain’s economy faces headwinds not easily resolved. For lenders, brokers and housing professionals, the outlook is one of tight affordability conditions, a weaker base of new buyers, and a policy environment shaped by the dual challenge of low growth and persistent inflation.
