UK Economic Insights – January 2025
Diverging Economic Trajectories in the US and Eurozone
In the last quarter of 2024, the economic fortunes of the US and eurozone diverged sharply. The US economy continued to demonstrate resilience, achieving a 0.6% growth in Q4 and a commendable annual increase of 2.8%, underpinned by strong consumer spending and sustained government expenditures. In contrast, the eurozone faced economic stagnation, with major economies such as France and Germany experiencing unexpected contractions in GDP. These downturns are reflective of the political unrest affecting business and consumer confidence, with France and Germany seeing declines of 0.1% and 0.2%, respectively, in their quarterly GDP figures.
UK Inflation Trends and Monetary Policy Adjustments
The UK saw a significant shift in inflation dynamics in December 2024, with the Consumer Price Index (CPI) decreasing to 2.5%—the first reduction since September and a figure slightly below the forecasted levels. This downturn spanned across both core and service sector inflation, signalling an easing of economic pressures, which will likely influence the Monetary Policy Committee (MPC) in its upcoming February meeting to consider a reduction in the bank rate. Despite this favourable trajectory in inflation, the labour market presents a complex picture: whilst total pay growth saw a robust annual increase of 5.6%, other labour market indicators hinted at an impending slowdown in employment and wage increases.
Investment and Productivity Challenges in the UK
Productivity growth in the UK remains a persistent challenge, significantly impacted by the financial crisis and the subsequent Covid pandemic. Efforts by both the government and the private sector to stimulate productivity have resulted in only a modest uptick in investment intentions. According to recent surveys, around 17% of large firms indicated plans to increase their capital expenditures in early 2025, predominantly driven by the necessity to replace ageing assets. This cautious investment climate is further complicated by the recent uncertainties stemming from tariff announcements and variable demand forecasts.
Implications of Global Trade Policies and Tariffs
The recent imposition of tariffs by the US on imports from Canada, Mexico, and China has triggered a series of negotiations and countermeasures, adding a layer of uncertainty to global economic projections. These trade policies are characterised by rapid shifts and strategic postponements, such as the 30-day delay in tariff implementation with Mexico and Canada, creating a volatile environment for businesses and policymakers. This turbulence is likely to impede global economic growth and impact consumer prices both in the US and internationally.
Reigniting the Debate on UK Airport Expansion
The debate on expanding Heathrow Airport has been reignited within the UK, emphasising not just the need for increased passenger capacity but also for boosting the UK’s trade capabilities, particularly with non-EU countries. The government views this infrastructure project as crucial to its broader economic growth strategy, aiming to facilitate higher-value trade in goods such as pharmaceuticals and electronics, which predominantly travel via Heathrow.
Conclusion
As we advance into 2025, the global economic landscape is characterised by a mix of resilience and challenges. Economic growth trajectories are diverging, inflation rates are fluctuating, and trade policies are evolving rapidly. Within this context, the UK is focusing on enhancing internal productivity and strategic infrastructure investments, such as the proposed expansion of Heathrow Airport, to bolster economic stability and growth. Policymakers will need to adeptly manage growth stimulation against inflationary pressures while adapting to the ever-changing dynamics of international trade and domestic economic priorities.