UK Economy Ends 2024 on a Positive Note, but 2025 Recovery Set to Be Slow

The UK economy delivered an unexpected boost at the end of 2024, with gross domestic product (GDP) growing by 0.1% in the fourth quarter, narrowly avoiding a predicted contraction. This modest but welcome expansion was primarily fueled by a strong performance in December, when the economy grew by 0.4%, driven by sectors such as wholesale trade, film distribution, and hospitality. The surprising resilience helped lift the UK’s total annual growth for 2024 to 0.9%, an improvement from the 0.4% seen in 2023. However, when adjusting for population growth, the picture is less encouraging, with output per capita declining by 0.1%, suggesting that many households may not have felt the benefits of this limited recovery.

Despite the year-end momentum, economists remain cautious about the outlook for 2025. Growth is expected to remain sluggish, with forecasts from major institutions painting a mixed picture. The Organisation for Economic Co-operation and Development (OECD) downgraded its forecast for UK growth in 2025 to just 1.3%, citing continued pressures from high interest rates, uncertain trade conditions, and weakening consumer and business confidence. The OECD also raised concerns about the UK government’s limited fiscal space, warning that unexpected economic shocks could derail efforts to meet fiscal rules and maintain public service funding.

The International Monetary Fund (IMF) offered a slightly more optimistic projection, raising its growth estimate for the UK to 1.6% for 2025. This upgrade reflects anticipated improvements in real incomes, which could support a modest rise in consumer spending. The IMF also expects the Bank of England to begin cutting interest rates, which would help ease financial conditions. However, inflation remains a persistent concern, with expectations that it will stay above the 2% target, potentially limiting how far and how fast rates can fall.

Domestically, consumer spending is projected to grow by 1.6% in 2025, up from 1% the previous year, buoyed by rising real wages and easing inflationary pressure. Still, business investment is likely to underperform, with forecasts suggesting only 2% growth, reflecting continued caution among firms due to higher borrowing costs and global economic uncertainty.

In sum, while the UK economy avoided recession in late 2024, the road ahead in 2025 looks challenging. Inflation limited fiscal headroom, and global instability all threaten to keep growth subdued. Policymakers will need to act carefully to support recovery while ensuring economic stability in the face of these persistent headwinds.