UK economy grows as Chancellor Rachel Reeves avoids recession

Chancellor Rachel Reeves was given a minor lift as the economy unexpectedly expanded at the end of last year, staving off an immediate recession.

The Office for National Statistics (ONS) reported that output grew by 0.1 per cent in the final quarter of the year, following a 0.4 per cent rise in GDP in December, as reported by City AM.

Economists had predicted a 0.1 per cent contraction, with month-on-month growth expected to be just 0.1 per cent in December.

"The economy picked up in December after several weak months, meaning, overall, the economy grew a little in the fourth quarter of last year," said Liz McKeown, ONS Director of Economic Statistics.

The UK's crucial services sector saw a 0.2 per cent growth over the quarter, while construction activity increased by 0.5 per cent. This compensated for a 0.8 per cent drop in production.

December's figures were bolstered by strong performances from pubs and bars, as well as the "often-erratic" pharmaceutical sector, according to McKeown.

"In a surprise twist, the UK economy beat expectations to end the year on a positive momentum," stated Sanjay Raja, chief UK economist at Deutsche Bank.

Over the entire year, GDP is estimated to have grown by 0.9 per cent, up from 0.1 per cent in a recession-hit 2023. However, GDP per head – a more accurate measure of living standards – fell 0.1 per cent across the final quarter, having dropped 0.3 per cent in the third quarter.

"Better than expected growth at the end of last year means that Britain has avoided another technical recession. But it remains mired in a living standards downturn, with GDP per person still below pre-pandemic levels," commented Simon Pittaway, senior economist at the Resolution Foundation.

The latest figures may provide some encouragement for Reeves as she endeavours to move beyond the challenging initial six months at the helm. With economic growth being a focal point of her administration's agenda, the slight improvement comes after a period of near-stagnation since spring, due partly to policies enacted under Reeves' leadership.

"It’s clear that a lot of the weakness is due to the rise in business taxes announced in October’s Budget as well as soft demand overseas," stated Paul Dales, chief UK economist at Capital Economics.

According to ONS data, corporate and consumer confidence saw significant decline following October’s Budget announcements by Reeves, which imposed tax increases totalling £40bn.

Surveys suggest companies are slashing jobs at rates not seen since the pandemic began, bracing for payroll cost increments set to come into effect in April.

Last week, the Bank of England adjusted its forecasts for 2025, slashing the growth prediction to 0.7 per cent from a former 1.5 per cent estimate.

The Office for Budget Responsibility (OBR) is anticipated to revise its projections downward next month—a move that could pressurise Reeves to implement spending cuts or potentially introduce further tax hikes later this year.

"Working people and businesses are already paying for her choices with ever rocketing taxes, hundreds of thousands of job cuts and business confidence plummeting," said Shadow Chancellor Mel Stride.

Despite the figures ensuring that the UK does not face an immediate recession, economists were divided about the direction of growth in the coming months.

"With business sentiment on the floor and employment declining, it’s hard to see private sector activity improving much in Q1 or Q2," commented Dales.

However, Ben Jones, lead economist at the Confederation of British Industry, suggested that the data supports the view that the slowdown in growth will be a "soft patch...rather than a slide back into stagnation".

Over recent weeks, Reeves has announced various measures – such as a third runway at Heathrow and changes to the planning regime – to try and stimulate the economy.

"For too long, politicians have accepted an economy that has failed working people. I won’t," responded Reeves to the figures.