In a surprisingly optimistic turn of events, the United Kingdom has reported growth at the end of 2024, offering a refreshing respite for the Labour government, which has been beleaguered by consistent economic downturnsAccording to the latest figures from the Office for National Statistics (ONS), the UK's Gross Domestic Product (GDP) experienced a quarterly rise of 0.1% in the fourth quarter, an improvement from the flat zero growth recorded in the third quarterThis unexpected increase has brought considerable relief to policymakers and economists alike.
Forecasts had predicted a contraction of 0.1%, and the positive output for December, which saw a notable growth of 0.4%, further mitigates fears of a prolonged recession looming in early 2025. This upward momentum marks a critical juncture for the UK economy, especially as it navigates the complex waters of post-pandemic recovery and global economic uncertainties.
While analysts may welcome the news, underpinning realities suggest a more nuanced pictureThe private sector and per capita output have been declining for two consecutive quarters, painting a less rosy outlook for long-term growthThroughout 2024, the total GDP growth remained modest at 0.9%, and the Bank of England has revised its growth forecasts down to a mere 0.7% for 2025, suggesting that the economic malaise might persist.
This recent data provides a small respite for Chancellor Rachel Reeves, whose ambitious vision for economic growth faced early challengesA slight uptick in overall figures could invigorate governmental morale, particularly with a crucial new forecast from the Office for Budget Responsibility (OBR) set to be released next monthThe current size of the UK economy is just above the levels seen when the Labour party assumed power in July, indicating a slow yet perceptible recovery trajectory.
The slight recovery in the fourth quarter signals a near stagnation, where businesses are maneuvering around higher taxes and uncertainties from foreign markets
Advertisements
As noted by one economist, "The budget decisions made in October have indeed driven growth in the public sector but have inadvertently resulted in a downturn in private sector activity." This delicate balancing act between supporting public services and fostering private sector growth remains a pressing concern for the government.
Post-release, the pound has continued its ascent, reaching its highest value in over a weekThis rally is largely attributed to a general weakening of the dollar, with the pound gaining approximately 0.9% over the weekThe ONS attributes December’s growth primarily to sectors such as hospitality, wholesale trade, movie distribution, machinery manufacturing, and pharmaceuticals, even as areas like computer programming, publishing, and auto sales faced declines.
However, a deeper analysis reveals a more discouraging scenario when population growth figures are taken into accountPer capita GDP has dipped by 0.1%, marking a continuous downward trend for the second quarter in a row, further complicating the country’s economic prospects.
Simultaneously, the data highlights the private sector's struggle, as it experiences a recession for two consecutive quartersIn contrast, public sector expenditures on healthcare, defense, and public administration have served as the primary engine of growthWhile government consumption increased by 0.8%, household spending stagnated, and corporate investment fell by a significant 3.2%. The ONS indicates that the recent decline in employment has contributed heavily to the flattening of consumer spending.
Bloomberg economists Ana Andrade and Dan Hanson emphasize that, “The unexpected GDP growth in the last quarter of 2024 indicates that the UK economy has sidestepped a winter recessionHowever, the details behind the data are far from optimistic—private demand remains significantly weak, with government spending being the main driver of growth.”
The subdued performance of the UK economy has inevitably constrained the Labour Party’s spending ambitions
Advertisements
Recent reports highlight that fiscal regulatory authorities have downgraded their growth projections, leading to concerns that Chancellor Reeves might face a budget deficit that could complicate equity in public finance.
As abrdn's deputy chief economist Luke Bartholomew notes, “It’s difficult to envisage that the economy could slip into a technical recession in the near termNonetheless, it’s likely that the OBR will have to substantially revise its growth forecasts downward, consequently imposing greater pressure on the Chancellor to adhere to fiscal rules.” This delicate balancing act reverberates throughout all levels of economic governance.
Since resuming power, the Labour Party has introduced measures aimed at enhancing the supply side of the economy, demonstrating a willingness to tackle contentious issues, including the greenlighting of the third runway at Heathrow AirportNevertheless, analysts caution that these initiatives might require significant time before they translate into tangible economic benefits; currently, the economy remains hampered by high interest rates, wavering consumer confidence, and escalated global threats.
The business community has voiced dissatisfaction with the first budget, which involves over £40 billion ($50 billion) in tax hikes, including an increase of £26 billion in employer national insurance contributions—moves that surveys suggest may inadvertently lead to job losses.
This economic data bears heavy implications for the Bank of England, whose rate-setters face the challenging task of reconciling persistent inflation pressures with the need to boost economic demandRecently, Bank officials voted in favor of a third interest rate cut within the current easing cycle but continue to provide conservative guidance on policy adjustmentsThere is a growing apprehension among dovish members of the Monetary Policy Committee regarding the necessity for more aggressive rate cuts in light of the economic slowdown.
Advertisements
Advertisements
Advertisements