The UK economy unexpectedly grew by 0.1% in the fourth quarter of 2024, buoyed by growth in the services sector, however, experts have cautioned that the outlook remains precarious.
Data from the Office for National Statistics showed GDP grew by 0.4% in December 2024, following growth of 0.1% in November and a 0.1% contraction in October.
Monthly services output grew by 0.4% in December, following growth of 0.2% in November. Production output also grew by 0.5% in December, but construction output fell by 0.2% during the month.
The ONS said overall, GDP grew by 0.1% in the three months to December 2024, compared with the previous quarter, beating expectations for the period and staving off the immediate risk of recession. However, market commentators cautioned that the outlook remains lacklustre.
Lindsay James, investment strategist at Quilter Investors, said: “The figures are a little better than expected, but the outlook is still concerning, with forecasts for the year ahead being adjusted to lower levels.
“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.
“The most sensible choice would seemingly be to address the current fiscal rules which mean that what is in essence a fairly immaterial shortfall, which is likely to be recovered in the coming years, will trigger spending cuts on already decimated public services.”
Danni Hewson, head of financial analysis at AJ Bell, commented: “The economy is hardly in good health and another quarter bumping along the bottom is not the growth the Government has promised. In fact, when you compare the UK economy with that of other G7 countries the UK wasn’t at the front of the pack in 2024, it was stuck somewhere in the middle with Germany and Italy bringing up the rear.
“The big question that must be troubling the Chancellor is how quickly this lacklustre economic performance can be turned around and in the near term how much that fiscal headroom has shrunk since the OBR’s last workings.”
Hewson said that while the GDP figures will bring a degree of relief to the Government, challenges lay ahead.
“With those tax increases still in the post and real concerns about trade if US tariffs gum up the global works, the Government’s plans will face difficulties if the economic engine is still running on fumes,” she added.
Derrick Dunne, CEO of YOU Asset Management, echoed the sentiment.
“Economists had expected a weak showing from the UK economy in the fourth quarter, but GDP figures were marginally ahead of expectations. Nevertheless, this doesn’t meaningfully change the outlook for the UK in the near term. Both the Monetary Policy Committee and the influential EY ITEM Club have lowered their growth expectations for 2025.
“There are some chinks of light. There has been a sharp decline in gilt yields, which lowers borrowing costs. The UK may also swerve the worst of the Trump tariffs, which may flatter its performance against its European peers. Nevertheless, confidence in the UK remains elusive. Rome wasn’t built in a day, and neither is the UK’s economic revival.”
Going forward, Rob Morgan, chief investment analyst at Charles Stanley, said there will likely be a continued small improvement, at least in the short term, but warned the “danger of recession hasn’t gone away.”
Morgan explained: “Consumers and businesses will continue to benefit from falling interest rates with three cuts made in the past six months or so. The boost to government spending should also provide a temporary uplift.
“It is likely to prove a struggle though. Many government initiatives including housebuilding and infrastructure investment could be hamstrung by a lack of construction and other skilled workers. Meanwhile, consumer confidence and spending could be jeopardised by a deteriorating employment picture.”
Morgan added: “The direction of inflation also hangs in the balance with higher energy prices, the impact of elevated employment costs and the wildcard of US tariffs still to unfold. It likely adds up to a lacklustre scenario without concerted efforts to break the cycle of low growth and high government borrowing costs.”
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