UK Economy Shows Unexpected Growth in Q4 2024, But Outlook for 2025 Remains Sluggish

The UK economy surprised many by growing 0.1% in the final quarter of 2024, defying expectations of a 0.1% contraction. This growth was largely driven by a stronger-than-expected December, with the services sector, including wholesalers, film distributors, and pharmaceutical companies, performing well. Despite this, there were signs of underlying weaknesses, as business investment dropped significantly, and household spending remained flat.

In 2024 as a whole, GDP grew by 0.9%, slightly higher than the 0.4% growth in 2023. However, when adjusted for population growth, output per head actually declined by 0.1%, reflecting continued pressure on living standards. The pound briefly strengthened against the US dollar, and government bond yields remained stable following the news, but experts cautioned that this positive data doesn’t signal an end to economic struggles.

Britain was the best-performing major European economy in Q4 2024, surpassing Germany, France, and Italy, which experienced contraction or stagnation. However, it still lagged behind the United States’ 0.6% growth. The strong performance in December was fueled by government spending and a likely temporary buildup in company inventories. Business investment, on the other hand, dropped by 3.2%, raising concerns about the effects of the recent tax increases on employers.

Looking ahead to 2025, the Bank of England lowered its growth forecast for the year to 0.75%, with some other forecasts predicting slightly higher growth. Experts continue to warn that the UK economy faces headwinds, including weak demand in Europe, high energy prices, and global trade challenges. Many businesses are planning cost-cutting measures such as reducing staff and investment in response to the rising tax burden.

The UK government, led by Finance Minister Rachel Reeves and Prime Minister Keir Starmer, has promised to implement regulatory reforms to stimulate growth, including tackling planning permit delays and removing barriers to business expansion. However, with persistent weak momentum, the outlook remains cautious, and further economic challenges, including the potential for spending cuts, could be on the horizon.

SOURCE: Reuters