The first official figures for UK GDP in the final quarter of last year may not have been quite as bad as expected, but it says a lot that some are keen to trumpet economic growth of just 0.1% as ‘good news’ and a much-needed ‘boost’ for Rachel Reeves. Quarterly growth of at least 0.4% should be the bare minimum, and hopefully higher..
The detail is also worrying.
Output per head fell again for the second successive quarter, meaning that headline growth is still flattered by the increase in the size of the population (and specifically by high levels of net migration to the UK). Put another way, the UK economy is back in recession in terms of output per head.
Moreover, the only positive contributions came from higher government spending (financed by more borrowing) and a temporary boost from the accummulation of inventories (as firms produced goods that they could not sell).
The latter is alarming because it means that any pick up in demand in early 2025 could be met from existing stocks rather than requiring new production.
Activity in the private sector actually shrank, led by a sharp (3.2% q/q) fall in investment, which is consistent with the gloomy messages from the business surveys.
The one positive thing I can say is that UK economy did at least manage to grow more quickly than other “major” (i.e. G7) European economies in Q4 2024, but this is not a high bar!
Even if the UK economy continues to skirt an outright recession, growth is likely to fall well short of the projections made by the OBR last year and baked into the Budget.
For now, I’m leaving my 2025 UK growth forecast at 1.0%, but even this would be half the rate anticipated by the OBR. Moreover, the risks are skewed to the downside, with a high chance that growth is weaker this year than last.
Further tax rises are therefore very likely, though not yet inevitable if spending can be controlled instead (obviously, a big ‘if’).
Crucially, the ‘fiscal headroom’ depends on the path of GDP over the whole of the OBR’s five-year horizon, not just the beginning. The OBR might still revise up its forecasts for the later years, as the Bank of England has done.
There are also many other moving parts including the assumptions about interest rates, though the OBR has already factored in a series of cuts.
The outlook for the public finances is therefore still poor, and the risk of a ‘doom loop’ of weaker growth, more tax increases, falling confidence and further weakness remains high. Indeed, this process may already have started.
In short, the foundations of growth in the private sector have been undermined by the increases in tax and other business costs announced in the Budget, as well as by more state intervention in the labour and energy markets.
Fears over jobs are starting to weigh on consumer spending, despite rising real incomes, while business investment is being crowded out by the increase in government borrowing.
Growth may recover a little over the course of 2025 as more of the boost from higher public spending feeds through. Admittedly, the main Budget measures have not kicked in yet (that happens in April), but businesses seem to have anticipated the negatives already.
We are also yet to see more of the positives (yes, there were some), including the boost to the incomes of low-paid workers from the increases in the national minimum wage. In the meantime, consumers are still relatively upbeat about the outlook for their own finances.
Nonetheless, the key message today is that the economy may be flirting with a recession all year – and the private sector is already in one. The Budget has hit the foundations of growth in the private sector and hit them hard.
Plain-speaking Economics 
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