UK Economic Review: March 2025 Summary
The UK’s economic growth for the final quarter of 2024 was slightly positive, showing a modest 0.1% increase in GDP. This marginal growth was better than the anticipated stagnant growth and marked a small step up from the previous quarters of the year. For the entirety of 2024, the UK economy expanded by 0.9% compared to the previous year, indicating a slow but steady recovery trajectory. In December 2024, the economy witnessed a notable 0.4% growth, predominantly driven by a boost in service activities, especially within the consumer-facing services such as hospitality which experienced solid growth in both November and December.
On the expenditure side, the components of GDP growth were mixed, with volatile contributions from household spending, business investment, and net trade. Consumer spending throughout the quarter remained relatively unchanged, while business investment declined. Inventory growth, which often shows irregular patterns, emerged as a significant contributor to GDP growth in the last months of the year. However, it is generally viewed as an unreliable and unsustainable boost to economic growth.
Early indications from 2025 suggest a varied start to the year. Retail sales data from the Office for National Statistics (ONS) reflected a recovery in January, boosted by robust post-Christmas trading particularly in non-store retail sectors and strong growth in food store sales volumes. This was attributed to a shift in consumer behavior towards eating at home more frequently. Although consumer confidence saw a slight uptick in February, the overall sentiment remains fragile.
Service sector activity has shown some signs of strengthening, which could support modest economic growth in the first quarter of 2025. However, manufacturing continues to underperform, with industry sentiment remaining subdued.
Monetary Policy Adjustments and Economic Forecasts
In response to the economic climate, the Bank of England’s Monetary Policy Committee (MPC) decided to reduce the Bank Rate by another 0.25 percentage points, bringing it down to 4.5% in early 2025. This unanimous decision came amidst a backdrop of easing inflationary pressures and wage growth moderation within the domestic economy. The MPC, however, remains divided on the trajectory of these economic pressures, balancing between weak activity and looser labor market conditions against potential risks from global trade policies and poor productivity.
Alongside the rate decision, significant revisions were made to the Bank’s growth and inflation forecasts. The initial expectations of consumer price index (CPI) inflation ticking higher due to a rise in the energy price cap at the beginning of the year materialized. Moreover, forthcoming increases in global energy costs and planned hikes in water bills are expected to further elevate CPI to around 3.7% by the end of the year. The growth outlook for 2025 was revised downwards to 0.75% from the previously anticipated 1.5%, reflecting lower expectations for household spending, business investment, and net trade.
Fiscal Policy and Outlook
The Chancellor of the Exchequer is scheduled to present the spring statement on March 26, amidst a backdrop of recent substantial fiscal announcements and ahead of a major spending review expected later in the year. Although the precise details of the spring statement remain uncertain, it will be influenced by the latest economic and fiscal forecasts provided by the Office for Budget Responsibility (OBR). These forecasts are critical as they will set the stage for the Chancellor’s policy decisions, especially in light of the moderated growth expectations and a slightly revised inflation outlook.
Public sector net borrowing is currently tracking above the forecast for FY 2024/25, raising concerns about the potential breach of newly established fiscal rules. This scenario might compel the Chancellor to implement corrective fiscal measures, possibly through tax increases or spending cuts, to maintain fiscal discipline and credibility.
International Context and Uncertainties
Global economic uncertainty remains heightened, particularly with ongoing adjustments in U.S. trade policy under President Trump’s administration. These changes have significant implications for international trade dynamics and economic policy uncertainty worldwide. The UK is closely monitoring these developments, especially potential trade agreements with the U.S. that could mitigate the impacts of new tariffs on UK exports.
In summary, the UK economy is navigating through a landscape marked by slow growth, moderate inflation adjustments, and significant fiscal and monetary policy decisions. As 2025 progresses, the interplay between domestic economic policies and international developments will crucially shape the economic outlook for the UK.