The UK economy unexpectedly stuttered into life at the end of last year, growing by 0.1% in the final quarter after zero growth the quarter before. It was largely thanks to a strong December, with UK GDP expanding by 0.4% on a monthly basis.
In 2024 as a whole, the economy grew by 0.9%, up from 0.4% the year before.
The latest GDP report is unlikely to invite celebration, however, as growth remains anaemic overall. For context, UK economic growth averaged around 2% per year before the 2008 global financial crisis. This year’s growth figure was less than half that rate.
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Furthermore, households are unlikely to feel richer as real GDP per head actually fell by 0.1% once population growth was taken into account. This figure is lower today than it was before the pandemic.
“In recent weeks, the chancellor has set out welcome plans to boost longer-term growth, but short-term action may be needed to get the economy out of its current slump,” said Simon Pittaway, senior economist at the Resolution Foundation, an independent think tank.
“With the government constrained by its fiscal rules, which the chancellor is already at risk of missing next month, many will be hoping the Bank of England can ride to the rescue with faster interest rate cuts,” he added.
The Bank of England cut interest rates by 25 basis points at its meeting in February, bringing the base rate to 4.5%. However, it also slashed its 2025 growth forecast in half from 1.5% to 0.75%.
GDP boosted by a strong December
Economists polled by news agency Reuters had expected the UK economy to contract by 0.1% in the final quarter of the year, but the overall figure was boosted by a strong December which saw growth in both services and production.
Over the quarter as a whole, the services and construction sectors grew by 0.2% and 0.5% respectively. Production fell by 0.8%.
“These figures confirm a better-than-expected end to 2024 as the loss of confidence following the Budget was more than offset by a bumper December where strong services activity helped boost overall output,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
There could be headwinds on the horizon, though. “Despite this positive outturn, the drop-off in economic activity in the second half of last year suggests that the big picture remains one of stagnation amid the loss of confidence following the Budget and longstanding difficulties, including poor productivity,” Thiru adds.
Reeves determined to go “further and faster” to boost growth
Responding to the latest figures, UK chancellor Rachel Reeves said that she was going “further and faster” to “put more money in people’s pockets” through her growth plan.
Reeves recently outlined a series of infrastructure projects including a third runway at Heathrow and better infrastructure connections between the research hubs of Oxford and Cambridge – an attempt to build Europe’s answer to Silicon Valley.
Labour has also declared a war on red tape in the hope that this will allow it to achieve its target of building 1.5 million new homes by the end of this parliament. The idea is that projects like these will create jobs for workers and contracts for businesses.
Some economists have welcomed the plans as a sensible, long-term step. However, the caveat is that it could be many years before spades go into the ground, and even longer before the projects are completed.
Another criticism is that Reeves’s growth plan will do little to counteract the damage done by the government’s tax-raising Budget. This increased National Insurance contributions for employers, thereby limiting the scope for growth by hampering businesses with additional costs.
Jason Hollands, managing director at investment platform Bestinvest, recently told MoneyWeek: “The decision to raise the National Insurance costs on employers, alongside hiking the minimum wage and incoming workers’ rights legislation, places a significant cost burden on businesses.
“This is a disincentive to hire (and a reason to cut staff), as well as an incentive to pass those costs on to consumers. All of this takes more money out of the real economy through rising unemployment and inflation, and provides a headwind to earnings.”
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