UK economy sees modest growth in fourth quarter, beating expectations

The United Kingdom’s economy grew by 0.1% in the fourth quarter of 2024, exceeding analysts’ expectations, according to preliminary estimates from the Office for National Statistics (ONS). Economists polled by Reuters had anticipated a 0.1% contraction, making this small yet positive growth a welcome surprise.

The services and construction sectors played a crucial role in this better-than-expected performance, expanding by 0.2% and 0.5%, respectively. However, the production sector experienced a decline of 0.8%. The ONS also reported a 0.4% month-on-month growth in December, spurred by a rebound in services and production, after mixed results in October and November.

Following the data release, the British pound strengthened, rising 0.4% against the U.S. dollar while remaining flat against the euro.

In response to sluggish economic growth and a recent dip in inflation, the Bank of England (BOE) last week implemented its first interest rate cut of the year, lowering its benchmark rate to 4.5%. The central bank has signaled additional rate cuts may be on the horizon as inflationary pressures ease. However, it warned that rising global energy costs and regulatory price adjustments could drive inflation to 3.7% in the third quarter of 2025 before it gradually falls to the BOE’s 2% target by 2027.

Despite these measures, the BOE halved its economic growth forecast for the UK, reducing it from 1.5% to 0.75% for the year. This downward revision places further pressure on Chancellor Rachel Reeves, whose fiscal policies, introduced last fall, have faced criticism for increasing tax burdens on businesses. The government’s decision to raise National Insurance contributions and the national minimum wage has sparked concerns that these measures could hinder investment, job creation, and overall economic growth.

Defending her economic strategy, Chancellor Reeves emphasized that the government is committed to eliminating barriers that prevent businesses from expanding. She maintained that the £40 billion in tax hikes included in the "Autumn Budget" were necessary to sustain public spending and stimulate economic growth.

Economists have broadly adjusted their expectations for UK economic growth in 2025, anticipating a weaker performance than previously projected.

Paul Dales, Chief UK Economist at Capital Economics, revised the country’s GDP growth forecast downward from 1.3% to 0.5% for 2025, citing higher business taxes, lingering effects from previous interest rate hikes, and weak international demand. Projections for 2026 have also been adjusted slightly, from 1.6% to 1.5%.

Similarly, Sanjay Raja, Senior Economist at Deutsche Bank, noted that near-term downgrades were "inevitable." He projected that the carry-over effect from the final quarter of 2024 could reduce the UK’s 2025 growth forecast by at least 0.25 percentage points. Raja also highlighted weak economic indicators at the start of the year, with purchasing managers' index (PMI) data pointing to only modest growth. Additionally, the risk of a trade war between major economies, including potential tariffs from the United States, could further impact the UK economy.

Trade uncertainty remains a key concern for the UK economy, particularly in light of potential U.S. tariffs. Former President Donald Trump has previously suggested imposing tariffs on goods from the European Union and the UK, though he has hinted that Britain may be able to negotiate an exemption.

The UK government remains hopeful that it can avoid these tariffs. Last month, Chancellor Reeves told CNBC that Britain is "not part of the problem" when it comes to the trade deficits that U.S. policymakers seek to address.

Last week, the BOE commented on the potential impact of U.S. tariffs, stating that such measures could have mixed effects on the UK economy. Lower demand for UK exports would likely reduce inflationary pressures, but supply chain disruptions could lead to short-term price increases.

While the UK economy narrowly avoided contraction in the fourth quarter of 2024, the road ahead remains challenging. With sluggish growth, revised economic forecasts, and potential trade disruptions, policymakers will need to navigate these uncertainties carefully. The government’s fiscal policies and the Bank of England’s monetary strategies will play a pivotal role in determining whether the economy can sustain its recovery or face further downturns in the months to come.