Economic outlook

Economy slowly returning to growth

Gross domestic product (GDP) grew by 0.1 percent in Q4 2024 compared to Q3, contrasting with widespread expectations for a 0.1 percent contraction and no growth in Q3. Throughout 2024, the economy grew by 0.94 percent.

The primary driver of the Q4 increase was a 0.5 percent growth in construction output and a 0.2 percent rise in services. However, weaker manufacturing activity led to an 0.8 percent drop in industrial production.

There was also a significant boost from Government spending, which grew by 0.8 percent in Q4 due to increased expenditure on public administration and defence, and higher activity in healthcare.

Measures announced in the 2024 Autumn Budget are expected to stimulate the economy this year. These financial measures, which largely take effect from April 2025, will inject an additional £32bn annually into the economy through increased borrowing and spending. This stimulus is expected to boost household consumption, expand the public sector, and increase business investment as confidence improves.

However, significant downside risks persist due to global trade uncertainty and potential supply chain disruptions caused by tariffs and retaliatory measures.

Source: Office for National Statistics

The Standard & Poor’s (S&P) February Global UK Output Purchasing Managers’ Index (PMI) indicated that business activity remained largely stalled for a fourth successive month, with an expectation of job losses amid falling sales and rising costs, partly due to the rise in the National Insurance Contributions due to take effect from April.

Inflation expected to remain above target in 2025

The headline rate of UK Consumer Price Inflation (CPI) rose by more than expected in January, picking up from 2.5 percent to 3.0 percent; the consensus forecast was 2.8 percent. This rise was driven by higher costs in food and drink, education fees and transportation.

Inflation is expected to remain above the 2 percent target this year due to base effects, that is comparing high prices today to lower prices a year ago, and the increased stimulus from the Autumn Budget, as previously discussed. Additionally, the increase in National Insurance Contributions (NICs) may prompt many firms to pass these costs onto higher prices.

Core inflation, which strips out food and energy prices, grew by 3.7 percent in January, while services inflation, a key indicator of domestic inflationary pressures, accelerated from 2.5 percent in December to 3.0 percent. This is a key measure for the Bank of England (BoE) as service inflation is influenced by wage pressures and contributing to keeping the CPI higher for longer.

Although financial markets marginally scaled back their expectations of a rate cut, the latest inflation data is unlikely to sway the BoE as the underlying price pressures are in line with the market expectations.

Source: Office for National Statistics and HM Treasury’s survey of independent forecasts

Employment and wage growth pick up

The ONS reported that the number of people in employment rose by 107,000 in the three months to December, while more timely data suggests stronger growth in January. The unemployment rate stayed at 4.4 percent, compared to a consensus forecast of a slight rise. These figures contrast to several surveys suggesting that employment numbers were softening as firms geared up for the impact of April’s increase in NICs.

As a result, regular annual wage growth rose from 5.6 percent to 5.9 percent in the three months to December. The latest data updates are in line with the BoE’s expectations.

Third Bank Rate cut

At its February meeting, the Bank of England’s Monetary Policy Committee voted to cut the base rate by 0.25 percent to 4.50 percent, the third cut since last August. The rate was held at 4.5 percent at the March Committee meeting.

Financial markets are now expecting a slower pace of rate cuts for 2025-2026 if inflation remains high, plateauing at around 3.75 percent – 4 percent in 2028. This would be in line with the BoE taking a cautious approach to rate cuts.