Recent data shows that the UK economy continues to exhibit signs of weakness. Analysis indicates that retail performance fell short of expectations, corporate investment prospects remain gloomy, and trade with the European Union is declining. These multiple downside risks suggest that the UK's economic growth in the first quarter of 2025 is also unlikely to be optimistic. Against the backdrop of unexpectedly easing inflation, expectations for further interest rate cuts by the Bank of England are rising.
Economic Weakness Continues to Show
The latest data released by the UK’s Office for National Statistics (ONS) shows that the UK’s Gross Domestic Product (GDP) grew by 0.1% month-on-month in November 2024. Among the major sectors, services grew by 0.1%, manufacturing contracted by 0.4%, and construction increased by 0.4%. In September and October of last year, the UK economy contracted by 0.1% month-on-month.
Although there was some growth in the UK economy in November last year, the three-month period ending in November showed zero growth. Previously, the Bank of England had expected the UK economy to also show zero growth in the fourth quarter of 2024.
The chief economist of the Institute of Directors (IOD), a think tank, stated that in the five months from July to November 2024, the UK economy grew at a rate lower than expected in four of those months, and it is highly likely that the economy was already in stagnation in the second half of 2024.
Retail data for December 2024 showed an unexpected decline, raising the risk of an economic contraction in the fourth quarter. According to the ONS, UK retail sales fell by 0.3% month-on-month in December 2024, while November's retail sales were revised downward to a 0.1% growth. In the fourth quarter of 2024, retail sales fell by 0.8% month-on-month but increased by 1.9% year-on-year.
Some research institutions are also pessimistic about the UK’s economic growth in the first quarter of 2025. The National Institute of Economic and Social Research (NIESR) forecasts that the UK economy will only grow by 0.3% in Q1 2025.
Trade between the UK and the European Union (EU) has also shown a declining trend in both imports and exports. According to ONS data, UK exports to the EU totaled £14.1 billion in November, a 1.3% decline from the previous month, while UK imports from the EU were £25.6 billion, down 1.2% month-on-month.
Analysts believe that the EU is the UK’s main trading partner. The disruption caused by Brexit in managing border goods has significantly impacted UK-EU trade, which is detrimental to UK economic growth. Organizations, including the British Chambers of Commerce, have called on the Labour government to actively promote the UK’s trade development.
Industry insiders believe that the UK’s economic growth remains weak, and UK GDP is expected to experience a slight recovery in 2025 and 2026, mainly driven by increased government spending. As many UK businesses struggle to cope with additional costs due to higher taxes, business investment in the UK may remain low, making it difficult to drive a turnaround in the economy.
The UK government now needs to focus on boosting growth more than ever. Some negative remarks from the government have undermined confidence in the UK economy during the second half of 2024, and sustained positive signals for growth are now needed. UK Chancellor of the Exchequer Rachel Reeves is expected to release industrial strategies and other plans at the end of this month, which could become an important opportunity to drive investment and growth.
The Confederation of British Industry (CBI) survey indicates that, under the new fiscal arrangements, UK business taxes will increase, and the minimum wage for employees will rise, putting significant pressure on business operations. In response to the new policies, private UK businesses will likely have to scale back investment and reduce their workforce, which could suppress economic growth.
Rising Expectations for Bank of England Interest Rate Cuts
Data shows that UK inflation unexpectedly slowed down in December 2024, leading the market to bet that the Bank of England will accelerate interest rate cuts, which contributed to a sharp rise in the UK stock market last week. The weakening of the British pound also contributed to the FTSE 100 index reaching a new high on January 17, 2025, marking its fourth consecutive week of increases.
Earlier, market expectations of high inflation and the risk of higher interest rates had pushed the UK’s 30-year government bond yields to their highest level in over two decades. However, with the latest inflation and economic growth data, UK bond yields have eased.
In December 2024, the UK Consumer Price Index (CPI) grew at an annual rate of 2.5%, slightly down from 2.6% in November. The month-on-month growth rate slowed to 0.3%, and core inflation also decreased from 3.5% to 3.2%.
The Bank of England had twice reduced the benchmark interest rate by 25 basis points in August and November 2024, but kept rates unchanged in December due to concerns about rising inflation risks.
According to data from the London Stock Exchange Group, traders believe there is an 82% chance that the Bank of England will cut interest rates by 25 basis points in February, with the possibility of a 66-basis-point reduction throughout 2025.
The International Monetary Fund (IMF) raised its UK economic growth forecast for 2025 by 0.1 percentage point to 1.6%, while maintaining its 2026 GDP growth forecast at 1.5%.
IMF Chief Economist Pierre-Olivier Gourinchas said that the upward revision of growth expectations reflects the positive impact of the budget announced by Chancellor Reeves in October 2024. Increased public investment will offset the negative effects of higher taxes, and factors such as rising household incomes and the Bank of England’s expected rate cuts are also favorable. He added that the Bank of England might cut rates once per quarter in 2025.
The Bank of England forecasts that the UK economy will grow by 1.5% in 2025. Last month, the Organisation for Economic Co-operation and Development (OECD) also raised its forecast for the UK’s 2025 economic growth from 1.2% to 1.7%.
Delay in Implementing Stricter Capital Requirements
On January 17, the Bank of England announced that it would delay the implementation of stricter global banking capital requirements under Basel III until January 2027. This agreement is an international banking regulation framework established after the 2008 financial crisis.
The Prudential Regulation Authority (PRA) of the UK also believes that more time is needed for the implementation plans in the US to become clearer, with competitiveness and economic growth considerations being key factors.
Analysts have pointed out that the Labour government has been pressuring UK regulators to take more measures to promote economic growth. Chancellor Reeves recently reiterated that regulators should play a key role.
The Bank of England has already indicated that it will adjust some of the Basel III requirements for UK banks, including capital requirements for small business loans.
In September 2024, the Bank of England also stated that it would lower the additional capital requirements that UK banks must hold under Basel III.
