GDP latest: Why UK’s surprise growth is no cause for celebration as living standards slide

“The economy is hardly in good health and another quarter bumping along the bottom is not the growth the government has promised” – Danni Hewson, AJ Bell

News that the UK avoided tipping into recessionary territory at the tail end of last year provides a reprieve for Rachel Reeves but the Chancellor should not be popping champagne corks any time soon.

Better-than-expected expansion in December meant that gross domestic product (GDP) edged up 0.1 per cent between October and December, following no growth in the previous three months. A technical recession would mean having two or more quarters in a row of falling output. Most analysts had been expecting the economy to contract slightly in the fourth quarter of last year, while the Bank of England had pencilled in a decline of 0.1 per cent, raising those recessionary fears.

The Office for National Statistics (ONS) estimated that GDP grew by a surprisingly robust 0.4 per cent in December - a notable pick up following a 0.1 per cent rise in November and a 0.1 per cent fall in October.

Chancellor Rachel Reeves is under pressure to grow the economy in the wake of an autumn Budget that was heavily criticised by businesses.

Statisticians noted that growth in services and production underpinned the expansion in December, which was the fastest monthly growth since March last year, and suggests that consumers spent more than expected in the run up to Christmas.

So, while the Chancellor can breathe a sigh of relief, there are mounting concerns over whether she will achieve her fiscal rules, as well as the impact on businesses, employment and investment from the measures outlined in the autumn Budget. A string of downbeat business surveys have highlighted the fears that companies have over increases in national insurance (NI) contributions and the minimum wage, which are due to take effect from April. Major employers in the retail and hospitality sectors in particular have warned of the negative impact these changes will have on hiring and investment, while the hikes could trigger a fresh spike in inflation.

According to Luke Bartholomew, deputy chief economist at Scottish investment firm Abrdn, the better-than-expected GDP data may act as “something of a narrative break”, with the economy unlikely to slip into a technical recession in the near term.

“Nonetheless, it is still very likely that the Office for Budget Responsibility will need to sharply downgrade its growth forecasts, putting more pressure on the Chancellor to meet her fiscal rules,” he added. “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.”

The latest GDP figures suggest that consumer spending may have been more resilient than previously thought despite poor weather.

The economic data comes one week after the Bank of England opted to trim borrowing costs to their lowest level in more than 18 months. The central bank’s monetary policy committee (MPC) voted for a quarter-point reduction to take the base rate to 4.5 per cent after similar cuts in August and November last year. That took interest rates to their lowest point since June 2023.

Most market traders expect that there will be two further rate cuts this year, though inflationary worries remain. Alongside the cut in borrowing costs, the Bank of England slashed its short-term growth forecasts for Britain’s economy, though these may need revisiting in light of the resilient GDP numbers.

On the inflation front, forecasts now point to a higher-than-expected peak of 3.7 per cent later in the summer. It presents a tricky balancing act for bank policymakers amid concerns the UK could enter a period of stagflation - where there is sticky inflation and muted economic growth.

Danni Hewson, head of financial analysis at investment firm AJ Bell, said there was always a possibility that the fourth-quarter GDP figures could be revised but for now the UK had dodged the “confidence sapping label of a technical recession”.

She added: “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.

“Interest rates may be falling but that takes time to filter through to households and many are still wary of spending as company after company warns that changes to employer NI will suppress wage increases and result in fewer jobs being created. Many more are still finding the impact of higher prices difficult to deal with, especially after a hike in the energy price cap, and warnings that inflation will nudge back up later in the year have further dented confidence.

“The big question that must be troubling the Chancellor is how quickly this lacklustre economic performance can be turned around.”

The fourth-quarter figures and an upward revision to first quarter output - to 0.8 per cent growth from 0.7 per cent previously - means the UK economy grew by 0.9 per cent overall in 2024, up from 0.4 per cent growth in 2023. The latest data also showed that living standards are under pressure, with real GDP per head - the volume of goods and services available to the average person, according to the ONS - dipping by 0.1 per cent in the last quarter and by 0.1 per cent across 2024 overall.

Sam Miley, managing economist and forecasting lead at the Centre for Economics and Business Research think-tank, noted: “In a further sign of the poor conditions facing the UK economy, GDP per capita fell by 0.1 per cent. This metric has now fallen for two consecutive years, suggesting declining living standards.”

Interest rate cut: The impact on your mortgage and savings and when will the next cut happen?