Analysis

‘On a knife edge’ - can Britain’s economy avoid a recession after lacklustre GDP?

“The government needs to come up with a credible plan to solve the productivity puzzle” – Julian Jessop, Institute of Economic Affairs

Britain risks returning to economic stagnation unless growth can be turbocharged, experts have warned, after a paltry increase in output in November.

The latest official figures showed that gross domestic product (GDP) - a measure of overall economic output - grew in November by 0.1 per cent after falling by the same percentage in both September and October. While it marks a return to growth, most economists had been expecting GDP to gain 0.2 per cent in November. The figure is also an estimate and, given the recent trend to revise downwards, could yet prove optimistic.

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The paltry growth for November also means that the UK economy would need to expand by at least 0.1 per cent in December just to avoid contracting overall in the final quarter of the year.

The dreary economic data and uncertain outlook has raised fresh recessionary concerns.The dreary economic data and uncertain outlook has raised fresh recessionary concerns.
The dreary economic data and uncertain outlook has raised fresh recessionary concerns.

In the short term, news of anaemic growth towards the tail end of last year ramps up the likelihood of a further cut in interest rates at the next meeting of the Bank of England’s monetary policy committee (MPC), due to be held on February 6. That should provide some relief to prospective home buyers and those needing to remortgage in the coming months, as well as easing the borrowing burden for many businesses. A further one or two rate cuts are expected by the end of the year.

The GDP data came a day after it emerged that the annual rate of consumer prices index (CPI) inflation had dipped to 2.5 per cent in December from 2.6 per cent in November. Most analysts had been expecting the inflation rate to remain unchanged but a fall in hotel prices helped offset a jump in the cost of fuel last month.

Thomas Pugh, UK economist at audit, tax and consulting firm RSM UK, said a combination of lower-than-expected inflation and weak economic growth meant an interest rate cut next month, to 4.5 per cent, was “now a sure bet”. Rob Wood, chief UK economist at Pantheon Macroeconomics, was in agreement, saying “the MPC will now certainly cut rates in February”.

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The inflation and GDP figures come after a difficult past couple of weeks for Chancellor Rachel Reeves, with government borrowing costs surging and the value of the pound on the slide amid worries over the economy and UK debt levels. Reeves has insisted she will “fight every day” to deliver economic growth after news of the weaker-than-expected expansion in November.

Storm clouds gather over the Bank of England, which is due to make a decision on interest rates on February 6.Storm clouds gather over the Bank of England, which is due to make a decision on interest rates on February 6.
Storm clouds gather over the Bank of England, which is due to make a decision on interest rates on February 6.

However, there are mounting fears the economy is heading for a period of so-called stagflation, where there is little or no economic growth combined with persistent inflation. Many economists believe that inflation will bounce back to 3 per cent in the coming months.

The November GDP figures take in the period after Reeves’ first Budget on October 30, which saw her announce more than £40 billion of tax rises including a hike in employers’ national insurance contributions.

Julian Jessop, economics fellow at the Institute of Economic Affairs, said the latest monthly data suggested that the UK economy was “sliding back into recession”.

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He noted: “The best we can hope for now is that GDP was flat in the fourth quarter as a whole. Even this would require a stronger December, which looks unlikely given the weakness in the business surveys.

“The UK is not yet in recession in terms of overall GDP, but output per head did fall in the third quarter of last year and almost certainly did so again in the fourth. The most likely scenario is still a shallow downturn, with inflation only rising a little further and unemployment remaining relatively low. This could best be described as ‘stagflation-lite’.

“The government needs to come up with a credible plan to solve the productivity puzzle, rather than simply double-down on the current policies of more tax, more public spending, and more state intervention.”

Rob Morgan, chief investment analyst at investment firm Charles Stanley, warned that the UK economy was “on a knife edge”.

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He said: “Inflationary trends could stay the hand of the Bank of England in terms of cutting interest rates and keep the handbrake on economic activity. Combined with the additional costs employers are taking on following measures unveiled in the Budget, the coming months could be an uphill struggle.

“The UK economy is therefore on a knife edge. To aim for a better outcome the government needs to engender a more growth-led narrative and provide incentives for business expansion to ultimately increase the overall tax take without upping already-high tax rates.”

Think tank the Resolution Foundation said the “disappointing” GDP data raised fears of economic stagnation. It argues that the UK will need to increase the current pace of growth in 2025, and beyond, if the government is to meet its economic milestones and raise living standards.

Simon Pittaway, senior economist at the Resolution Foundation, said: “In recent years the UK has been a growth rollercoaster, with a recession in late 2023 followed by a bounce back in early 2024. But its longer-term record is one of economic stagnation, and that is where Britain risks returning to. The paltry GDP growth late last year reinforces the need for the government’s economic plans to start bearing fruit.”

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The Unite trade union is calling for the UK economy to be “rebooted to cure anaemic growth” and is urging “serious public investment” in “critical infrastructure and foundation industries”.

The GDP figures showed the all-important services sector drove the return to growth, with output in the sector rising 0.1 per cent. Construction also grew, up by 0.4 per cent, led by new commercial developments, though production continued to decline, down by 0.4 per cent in November.

Andrew McRae, Scotland policy chair at the Federation of Small Businesses (FSB), said: “These stagnant figures underline just how delicate the economic situation is and why we need government measures - in Westminster and Holyrood - to boost growth now.

“Small businesses are worried about rising costs, lumpy cashflow and the raft of proposed changes to employment law. That’s knocking their confidence and firms that aren’t confident don’t invest and don’t hire new staff - not a recipe for economic growth.”

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