"Growth remains fragile, and with ongoing inflation pressures and weak consumer spending, the Bank of England will need to tread carefully with interest rate decisions in the coming months."
- Exchange market expert Russell Gous
UK GDP rose by 0.1% in the last three months of 2024, up from 0% growth in the previous quarter and above economists' predictions of a 0.1% fall.
Monthly GDP is estimated to have grown by 0.4% in December, largely because of growth in the service sector, following growth of 0.1% in November. Compared with the same month a year ago, GDP is estimated to be 1.5% higher in December 2024.
Annually, output GDP is now estimated to have grown by 0.8% in 2024 compared with 2023.
However, real GDP per head is estimated to have fallen by 0.1% in Q4.
Economists were upbeat about the better-than-forecast GDP figures for Q4, but warned that the UK economy is not out of the woods yet.
Luke Bartholomew, deputy chief economist at abrdn, said: “While still very weak in absolute terms, today’s GDP numbers were much better than expected and may act as something of a narrative break. Certainly it is difficult to see the economy slipping into a technical recession in the near term now. Nonetheless, it is still very likely that the OBR will need to sharply downgrade its growth forecasts, putting more pressure on the Chancellor to meet her fiscal rules. And there are still material headwinds from the upcoming National Insurance increase, which is likely to weigh on employment and push up on inflation. So further gradual interest rate cuts are still likely.”
Exchange market expert Russell Gous, commented: "Today’s surprise GDP growth of 0.1% offers a glimmer of resilience for the UK economy, but it’s far from a strong recovery. Growth remains fragile, and with ongoing inflation pressures and weak consumer spending, the Bank of England will need to tread carefully with interest rate decisions in the coming months.
For sterling, this marginal growth is unlikely to provide much lasting support. The pound’s performance will continue to be driven by interest rate expectations, and if markets believe the BoE will still move forward with cuts, any gains in GBP may be short-lived."
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “This morning’s data confirms that the UK economy narrowly managed to avoid a contraction in the final quarter of 2024, owing to a stronger than expected outturn in December. Coming off the back of flatlined growth in Q3, the results ease the pressure on the Chancellor, in grave danger of breaking her fiscal rules at the start of the new year.
“Last week the Monetary Policy Committee voted to cut the base rate, accompanied by a sharp reduction in forecast growth for 2025, suggesting no robust turnaround and a subdued outlook for the immediate future. Business surveys indicate that depressed confidence will keep business investment decisions at a low ebb, but government spending should act as a partial offset, as it did over the latter part of 2024.
“While the Bank of England would surely like to aid the ailing economy, rate-setters' willingness to opt for further rate cuts will depend on how persistent inflationary pressures prove to be.”
Rob Morgan, chief investment analyst at Charles Stanley, added: "Having slumped to no growth in the third quarter, a 0.1% increase was confirmed for the final three months of the year driven by expansion in services. It provides some rare relief for Chancellor Rachel Reeves as economists had previously expected a slight contraction for the month, which would have meant the economy came within a whisker of recession.
"While not setting the world alight, the year-on-year figure for economic growth of 1.5% is respectable given the challenges of higher inflation and interest rates.
"It is not a time for victory laps certainly, and the danger of recession hasn’t gone away, but relative to expectations this is a win for the Chancellor. Concerns of a weak festive period did not transpire, and it offers something to build on this year.
"Overall, it appears likely there will be a continued small improvement, at least in the short term. 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, plus some businesses are expected to retrench following Budget measures that involve higher employment costs.
"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.
"The economic environment is still fragile and the Bank of England won't be having any regrets about last week’s decision to cut interest rates. Its greater focus on the growing risks to growth is still very much warranted.
"However, lingering economic resilience reduces the likelihood of a back-to-back cut coming in March and turns the focus more to inflationary pressures that may prove difficult to flush out of the system."
