UK economy unexpectedly picked up in late 2024, outlook for 2025 still 'sluggish'

By David Milliken and Andy Bruce

LONDON (Reuters) -Britain's economy unexpectedly grew by 0.1% in the final quarter of last year, official figures showed on Thursday, offering some respite from the downbeat economic picture facing finance minister Rachel Reeves, though longer-term challenges remain.

Economists polled by Reuters had forecast that British gross domestic product would shrink by 0.1% in the period, but the quarter was lifted by stronger-than-expected growth of 0.4% in December.

Across 2024 as a whole, GDP grew by 0.9% after 0.4% growth in 2023.

But adjusted for a rising population, output per head fell by 0.1% last year, highlighting ongoing pressure on living standards and the public finances.

Sterling briefly strengthened by as much as a third of a cent against the U.S. dollar after the data while government bond yields were little changed.

"A pleasant surprise, but we're not out of the woods yet. Beneath the surface of these latest figures, domestic demand via consumption and business investment was weaker than expected," said Scott Gardner, an investment strategist at Nutmeg, a wealth manager owned by J.P. Morgan.

Britain was the best performing major European economy in the fourth quarter - with Germany and France shrinking and Italy stagnant - but trailed behind the United States' 0.6% growth.

December's growth reflected a robust performance by Britain's large services sector, with wholesalers, film distributors, pubs and bars doing well, as did machinery manufacturers and pharmaceutical companies, the Office for National Statistics said.

However, the figures showed growth also relied on government spending and a likely temporary build-up in companies' inventories, while business investment dropped by a hefty 3.2% on the quarter and household spending was flat.

The decline in business investment may revive concerns about the impact of a 25 billion pound ($31 billion) tax rise on employers announced by Reeves in the new Labour government's first budget on Oct. 30. The ONS data showed the fall was driven by a drop in transport equipment, a volatile component which had been strong in the third quarter.

TOUGH OUTLOOK

Last week the Bank of England halved its forecast for growth in 2025 to 0.75%, although other forecasters such as the National Institute of Economic and Social Research remain more upbeat with a 1.5% growth prediction.

Speaking to Reuters on Wednesday, Bank of England Chief Economist Huw Pill highlighted his concerns about the supply capacity of the economy which limited its ability to meet demand and put upward pressure on inflation.

Britain's economy enjoyed moderate growth in the first half of 2024 as it emerged from a shallow recession in the latter half of 2023, but then recorded zero growth in the third quarter.

Businesses have said they plan to cut staff, raise prices and lower investment this year in response to the tax rises announced in the budget.

Other headwinds include weak demand elsewhere in Europe, higher energy prices and the prospect of a slowdown in global trade due to tariffs under U.S. President Donald Trump.

"Underlying momentum remains weak. We continue to expect sluggish growth through spring, with the fiscal easing from last year's autumn budget driving a pickup in activity over summer," said Debapratim De, director of economic research at Deloitte.

Reeves and Prime Minister Keir Starmer have said they will reduce planning permit delays and other regulatory barriers to boost confidence, a message Reeves repeated after Thursday's data.

"We are taking on the blockers to get Britain building again, investing in our roads, rail and energy infrastructure, and removing the barriers that get in the way of businesses who want to expand," she said.

The Conservative opposition said the fall in GDP per capita meant Reeves was presiding over a recession in living standards.

A rise in borrowing costs and the subdued economic picture mean Reeves may be forced to announce spending cuts if she is to stay within her self-imposed borrowing rules when government forecasters update their projections next month.

($1 = 0.8006 pounds)

(Reporting by David Milliken and Andy BruceEditing by Kate Holton, Bernadette Baum, Kirsten Donovan)