Investing.com - The U.K. economy unexpectedly grew in the final quarter of last year, ruling out the possibility of the sixth largest economy in the world falling into recession early in 2025, but the outlook still looks lackluster.
Data released earlier Thursday by the Office for National Statistics showed that U.K. gross domestic product expanded by 0.1% in the fourth quarter, after failing to grow in the prior quarter.
On an annual basis, the U.K. economy grew by 1.4%, an improvement from the revised 1.0% growth over the previous three months.
U.K. gross domestic product rose 0.4% in December on a monthly basis, an improvement from the 0.1% growth seen in November.
"To be sure, this was the best set of GDP data one could have hoped for – given survey data and hard data to end the year," said Sanjay Raja, U.K. Chief Economist at Deutsche Bank (ETR:DBKGn).
"But vulnerabilities remain. Moving into 2025, uncertainty remains rife. Survey data point to a sluggish rebound at the end of the year – at best. The spectre of a trade war looms large. Commodity prices have risen – with energy bills now projected to rise meaningful through the next few months, adding to cost of living
pressures."
The Bank of England cut interest rates last week by 25 basis points, reducing its base rate to 4.5% from 4.75%, a continuation of the recent trend toward easing borrowing costs after rates reached a 16-year high.
The UK central bank also downgraded its growth forecasts for 2025, halving its projection from 1.5% to 0.75%, suggesting that further interest rate cuts are on the horizon.
This had raised expectations that the final quarter of last year would see a contraction, raising the potential for the U.K. to suffer a second shallow “technical recession” in little more than a year if the first quarter of 2025 also proved disappointing.
A recession is generally defined by economists as two successive quarters of negative growth.
"We aren’t expecting the economy grow much at all in the coming quarters," said analysts at Capital Economics, in a note.
"With business sentiment on the floor and employment declining, it’s hard to see private sector activity improving much in Q1 or Q2. Overall, the economy is unlikely to do more than move sideways over the next six months."
Additionally, even with the better than expected end to 2024, Chancellor Rachel Reeves will have problems balancing the books in the new year.
"The combination of weaker growth and higher market rates has likely eroded the already-limited fiscal ’headroom’ granted to the chancellor," said analysts at ING, in a note.
The Office for Budget Responsibility – the government’s independent forecaster – has predicted 2% growth this year. It now looks likely it will be around half that.