How much will the UK economy grow in 2025?

Decoding the efficiency of the UK economic system in 2024 has been a problem.

In the beginning of the 12 months, most forecasters anticipated that the UK would undergo one other 12 months of stagnation.

“Expectations had been bleak coming into 2024,” Sanjay Raja, chief UK economist at Deutsche Financial institution, stated. “Exterior forecasters had been projecting close to zero per cent development for the whole 12 months.”

The truth is, the economic system noticed a fast rebound from the recession which closed out 2023. Within the first quarter, the UK grew 0.7 per cent.

Throughout the primary half of the 12 months, the UK was among the many quickest rising G7 economies on the planet.

It was to not final.

Having been one of many quickest rising economies within the first half of the 12 months, the economic system has slowed considerably.

Figures out earlier this month confirmed that the economic system contracted for a second consecutive month in October. Certainly, it has been kind of stagnant since June.

“The chance of a recession has abruptly change into actual,” Paul Dales, chief UK economist at Capital Economics stated.

Because of the robust first half, the UK remains to be on monitor to develop 0.8 per cent this 12 months. However what occurred to the robust momentum seen earlier within the 12 months?

What occurred to the UK economic system?

There are three overlapping components.

The primary is {that a} slowdown was all the time going to occur. That’s as a result of the restoration from the beginning of the 12 months was fuelled by ‘catch-up’ development.

In 2023, the UK carried out properly in need of its potential development price, that means there was loads of unfilled capability. At first of 2024, it bounced again.

Companies had been extra assured in taking the selections which may have been placed on maintain a number of months in the past. Households had been extra more likely to spend a bit extra, too. This was by no means going to final endlessly.

Nonetheless, the slowdown has been much more pronounced than many anticipated a number of months in the past.

Which brings us to the second issue: rates of interest.

Market expectations for the trail of rates of interest – and, due to this fact, the price of borrowing in the actual economic system – have modified so much this 12 months.

At first of the 12 months, markets anticipated round 5 price cuts when, in reality, there have been solely two.

This transformation in expectations has had an affect on exercise. Evaluation from Capital Economics means that the fastest-growing sectors earlier within the 12 months had been these with the very best sensitivity to adjustments in rates of interest (i.e. these with probably the most to realize from fast price cuts).

As these price cuts did not materialise, exercise slowed.

“Hopes at first of this 12 months that rates of interest would fall quickly have given approach to the truth of charges being diminished solely progressively,” Dales stated.

There may be, in fact, a remaining issue. Coverage.

Rachel Reeves should take among the blame

The timing of the slowdown neatly aligns with Labour getting into energy and Rachel Reeves should take among the blame.

Shopper and company confidence plummeted over the autumn amid warnings of a painful finances. Enterprise surveys because the fiscal occasion have pointed to a continued slowdown, largely as a result of enhance to nationwide insurance coverage.

The non-public sector reduce jobs on the quickest price for practically 4 years in December, in accordance with S&P’s buying managers’ index (PMI).

“Companies and households have responded negatively to the brand new Labour authorities’s downbeat rhetoric and insurance policies,” Chris Williamson, chief enterprise economist at S&P International Market Intelligence stated.

This hardly bodes properly for subsequent 12 months. Nonetheless, financial forecasters anticipate the UK to develop 1.3 per cent in 2025, an acceleration on 2024.

The case for optimism rests on a number of strong fundamentals. The labour market stays strong, serving to to help robust wage development even whereas inflation continues to fall.

Throw into this the final deleveraging of family stability sheets because the monetary disaster, and UK customers will not be in a nasty place.

In fact, so much will rely upon how companies reply to the nationwide insurance coverage hikes. There’s additionally a wholesome dose of uncertainty to come back from a second Trump presidency. However economists will not be writing off the UK simply but.