The UK economy grew 0.4% in December, mainly thanks to the improved growth of the service sector, the Office for National Statistics (ONS) announced this morning.
The print beat market expectations of 0.1% and led to a surprise uptick in quarterly growth, which came in at 0.1% between October and December 2024 instead of being in negative territory.
However the news failed to excite experts, who remained unanimously concerned, as the Bank of England halved its growth forecast for the year to 0.75%.
This leaves Chancellor Rachel Reeves with the difficult choice of either cutting spending, raising taxes or adjusting her fiscal rules at the spring statement in March, according to Lindsay James, investment strategist at Quilter Investors.
“The government has committed to having only one fiscal event per year and has made oft-repeated assurances that it will leave the main sources of tax revenue well alone. The Treasury’s soundbite of ‘non-negotiable fiscal rules’ has been repeated so often that the only plausible solution appears to be spending cuts,” she said.
“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.”
Scott Gardner, investment strategist at J.P. Morgan-owned digital wealth manager, Nutmeg, agreed that the UK is not out of the woods.
“Beneath the surface of these latest figures, domestic demand via consumption and business investment was weaker than expected. What will worry some is that we are also yet to see the full impact of the measures announced in the Autumn Budget including changes to National Insurance contributions,” he said.
Looking ahead, Gardner believes the housing market is key for a sustained uptick in growth through 2025, beyond the rush to beat the Stamp Duty increase in April.
“Lower interest rates will definitely help policymakers, but so will a recovery in consumer confidence. If growth remains poor, this will continue to weigh more heavily on the domestic-facing FTSE 250,” he concluded.