1:39 pm - February 13, 2025
The UK economy showed a modest expansion of 0.1% in the final quarter of 2024, according to preliminary data from the Office for National Statistics (ONS). This small growth defies expectations of a 0.1% contraction, easing some immediate concerns about a recession. However, the economy remains fragile, with the margin between growth and contraction being extremely narrow. This means that future revisions to the data could potentially tip the balance in either direction. The ONS also revealed that for the entire year of 2024, GDP growth was 0.9%, but the more critical measure of GDP per capita, which reflects living standards, contracted for two consecutive quarters. This troubling trend highlights the ongoing pressure on households and the broader economy.
The government, which has made economic growth a key priority, is facing intensifying scrutiny. Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves were criticized earlier in the year for signaling a tough budget, which some argue undermined business and consumer confidence. Despite efforts to shield working people from financial pain, businesses have expressed concerns about upcoming increases in employer National Insurance contributions, warning that these could reduce investment, lead to job cuts, and limit pay increases. These challenges, coupled with weak economic growth, have created a difficult environment for policymakers.
While the chancellor may find some relief in the latest GDP figures, which exceeded expectations, the broader economic picture remains concerning. The UK economy is still largely stagnant, with GDP per capita shrinking for two quarters. Compared to the US, the leading G7 economy, the UK’s performance is significantly weaker. The recent December growth surge, which provided a late boost to the economy, has lifted cumulative growth since last year’s election to 0.4%, but this does not alter the fact that the UK is struggling to achieve sustained growth. The economy is also grappling with the long-term effects of rapid population growth, which has reduced income per household, and the decline of key industrial sectors that once powered economic expansion.
The UK’s economic challenges are further complicated by external factors. For instance, the US has threatened to impose widespread tariffs on UK imports, which could have a significant impact on trade. Additionally, the UK is being pressed to increase defense spending, adding to financial pressures. These external risks, combined with domestic challenges, make it increasingly likely that global events could disproportionately affect the UK economy. Meanwhile, inflation is once again on the rise, with essential bills for water, energy, and council tax set to increase sharply in the spring, further squeezing household budgets.
The Bank of England’s latest projections paint a sobering picture, with inflation expected to rise to 3.7% in 2025, up from the current 2.5%. Economic growth is forecast to slow to 0.75%, down from the 1.5% predicted just a few months ago. This lack of growth poses a significant problem for the chancellor, as it limits potential tax revenues at a time when public finances are already strained. The Treasury has also launched an inquiry into a leak of updated Office for Budget Responsibility forecasts, which reportedly downgraded UK growth expectations. These developments underscore the fragile state of the economy and the difficulties policymakers face in achieving their goals.
In response to the ONS data, Chancellor Rachel Reeves emphasized her commitment to improving living standards and boosting growth through the government’s “Plan for Change.” She highlighted investments in infrastructure and efforts to remove barriers to business expansion. However, opposition leaders, including Shadow Chancellor Mel Stride, have criticized the government’s policies, arguing that they are stifling growth through higher taxes and reduced business confidence. As the UK navigates this challenging economic landscape, the immediate relief from the latest GDP figures may be short-lived. With inflation rising, global trade tensions, and weak economic fundamentals, the UK’s economic outlook remains uncertain, leaving many to wonder how long the current sense of cautious optimism can persist.