The UK’s gross domestic product (GDP) increased by 0.1% during the final three months of 2024, according to the latest figures from the Office for National Statistics (ONS), versus consensus forecasts of a 0.1% fall.
The increase was largely driven by growth in the services sector, with services output growing by 0.4% in December last year, and 0.2% in November. Overall, services output grew by 0.2% during Q4 last year.
Monthly real GDP rose by 0.4% in December, compared with an anticipated 0.1% rise.
Lindsay James, investment strategist at Quilter Investors, said this morning’s figures are “a little better than expected” but that the outlook is “still concerning”, with forecasts for the year being revised down to lower levels.
“The Bank of England has slashed its forecasts in half from 1.5% to 0.75% growth this year, leaving OBR forecasts from October – which projected 2% growth in 2025 and 1.8% in 2026 – looking very out of kilter,” she warned.
“While gilt yields have fallen since the volatility seen in mid-January, recently downgraded estimates for the UK economy will be a far greater concern to Chancellor Rachel Reeves. She will likely face the difficult choice of either cutting spending, raising taxes or adjusting her fiscal rules at the spring statement in March.
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“However, the government has committed to having only one fiscal event per year and has made oft-repeated assurances that it will leave the main sources of tax revenue well alone. Meanwhile, the Treasury’s soundbite of ‘non-negotiable fiscal rules’ has been repeated so often that the only plausible solution appears to be spending cuts.”
Patrick O’Donnell, senior investment strategist at Omnis Investments, doesn’t think the market will “materially reassess the growth trajectory of the economy today” based on the news, and that market moves “shouldn’t be material”.
“A lot can happen between now and when the OBR delivers its final update to the spring forecast in March,” he said. “For example, economic models will show that a recent update from the ONS showing faster population growth will boost potential GDP growth by the end of the parliament, therefore replacing some of Chancellor Reeves lost fiscal headroom. Time will tell.”
Michael Brown, senior research strategist at Pepperstone, concurred that today’s figures, despite surprising to the upside, are “hardly worth celebrating” and described the UK’s pace of growth as “anaemic”.
“The new year has already got underway in rather soft fashion, as business and consumer confidence both remain subdued, and with the spectre of further tax hikes, or government spending cuts, looming large in the late-March ‘Spring Statement’,” he warned. “Furthermore, risks to the outlook tilt clearly to the downside, particularly with businesses set to be battered by April’s sharp rise in National Insurance contributions.
“Despite being better than expected, momentum remains dismal, and the Q4 GDP figures reinforce my base case for 2025 to be a year of ‘stagflation’ for the UK economy, experiencing little-to-no economic growth, and stubbornly high inflation, which the Bank of England now see peaking at almost 4% this autumn.”
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Against the current backdrop, Brown said policymakers are “unlikely to be able to ease policy more rapidly, or more substantially” than one 25 basis-point rate cut per quarter.
“My base case remains that Bank Rate will end the year at 3.75%, with three further reductions being delivered, at meetings which coincide with the release of updated economic projections,” he continued.
“In fact, it would be folly for policymakers to move to normalise policy more rapidly, with such a move heightening the risks of embedding the present elevated level of inflation within the economy.”
While Quilter’s James added that the UK is still expected to see an uptick in growth throughout the year, she said high levels of uncertainty remain.
“The impact of US tariffs is one of the largest risks as even if British goods are not targeted, many British firms contribute to global supply chains that will be affected,” she reasoned. “In addition, higher energy costs, with European natural gas recently hitting two year highs, will not help matters.
“While the outlook is rather dreary, a glimmer of hope has come in the form of UK equities which have begun the year on a stronger footing, with returns exceeding those from US equities. This reflects the benefit of international revenues, providing a clear reminder that diversification remains crucial for investors.”
This story was written by our sister title, Portfolio Adviser
