13 February 2025
If you are covering the latest UK GDP data, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
“The UK economy has proven stronger than expected in this morning’s GDP print, with monthly real GDP up 0.4% in December compared to the 0.1% that had been anticipated, largely due to improved growth in the service sector. This fed into a surprise uptick in quarterly growth, albeit only 0.1% between October to December 2024. Given there was no growth in the previous quarter and a contraction had been expected, even minimal growth such as this is a positive.
“This morning’s figures are a little better than expected, but the outlook is still concerning, with forecasts for the year ahead being adjusted to lower levels. The Bank of England has slashed its forecasts in half from 1.5% to 0.75% growth this year, leaving OBR forecasts from October – which projected 2% growth in 2025 and 1.8% in 2026 – looking very out of kilter.
“While gilt yields have fallen since the volatility seen in mid-January, recently downgraded estimates for the UK economy will be a far greater concern to Chancellor Rachel Reeves. She will likely face the difficult choice of either cutting spending, raising taxes or adjusting her fiscal rules at the spring statement in March. However, 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. Meanwhile, the Treasury’s soundbite of ‘non-negotiable fiscal rules’ has been repeated so often that the only plausible solution appears to be spending cuts.
“The most sensible choice would seemingly be to address the current fiscal rules which mean that what is 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. That this approach is due to change in 2026/27, when a tolerance of +/-0.5% of GDP will be added to the balanced budget approach in order to help avoid the exact scenario currently faced, underlines the fallacy of cutting spending at this juncture.
“The UK economy is still expected to see an improvement in growth as we move through 2025, but high levels of uncertainty remain. The impact of US tariffs is one of the largest risks as even if British goods are not targeted, many British firms contribute to global supply chains that will be affected. In addition, higher energy costs, with European natural gas recently hitting two year highs, will not help matters.
“While the outlook is rather dreary, a glimmer of hope has come in the form of UK equities which have begun the year on a stronger footing, with returns exceeding those from US equities. This reflects the benefit of international revenues, providing a clear reminder that diversification remains crucial for investors.”
