The United Kingdom squeezed out a modest 0.1% GDP gain in the fourth quarter, sidestepping forecasts of contraction, according to preliminary data from the Office for National Statistics (ONS).
Economists had braced for a 0.1% decline, but stronger-than-expected performance in services and construction helped push the economy into the green.
Despite the uptick, Britain’s economic momentum remains fragile. The services sector, which makes up the lion’s share of GDP, climbed 0.2%, while construction posted a 0.5% gain.
However, industrial production dragged, falling 0.8%. December’s 0.4% monthly expansion provided a bright spot, but sluggish growth and a recent inflation drop nudged the Bank of England (BOE) to hold interest rates steady at 5.25%.
Market Reactions and Policy Shifts
Sterling inched up 0.4% against the dollar following the GDP release, holding steady against the euro.
The BOE, seeing inflationary pressures easing, signaled potential rate cuts ahead. Yet, with global energy costs in flux and regulatory price shifts expected to push inflation to 3.7% by Q3 2025, the path to stability remains uncertain.
The central bank expects inflation to settle at 2% by 2027 but has halved its 2024 growth outlook from 1.5% to 0.75%.
That economic backdrop places Chancellor Rachel Reeves in the hot seat.
Her Autumn Budget, featuring £40 billion in tax hikes, has drawn sharp criticism from business leaders who argue rising employer contributions to National Insurance and a higher minimum wage could dampen investment and job creation.
Reeves, however, defended the plan, saying the government was “removing the barriers that get in the way of businesses who want to expand.”
Forecast Downgrades and Business Sentiment
Looking ahead, analysts are tempering their expectations.
Paul Dales, chief UK economist at Capital Economics, cited higher corporate taxes, residual effects from prior rate hikes, and softening international demand as reasons for revising 2025 GDP projections from 1.3% to 0.5%.
Deutsche Bank’s Sanjay Raja echoed the downbeat outlook, saying Q4’s weak handoff makes a 2025 downgrade inevitable.
Initial estimates peg the reduction at around 0.25 percentage points, with downside risks still mounting.
Early-year survey data offers little reassurance, with PMI figures hinting at a lackluster Q1 rebound.
Raja warned that “the threat of a trade war looks stronger too,” injecting fresh uncertainty into the economic picture.
Trade Tensions and US Tariff Threats
Across the Atlantic, the specter of new tariffs adds another layer of complexity. Former U.S. President Donald Trump has floated the idea of fresh duties on EU and UK goods, though London hopes to sidestep the fallout.
Reeves told CNBC last month that Britain is “not part of the problem” when it comes to America’s trade deficit concerns.
The BOE acknowledged the tariff threat, noting its potential to act as both an inflationary and disinflationary force.
On one hand, lower U.S. demand for UK exports could ease price pressures. On the other, supply chain disruptions could trigger short-term cost spikes. Either way, economic uncertainty is unlikely to fade anytime soon.
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