The United Kingdom's economy showed a significant loss of momentum in the final quarter of 2024, with preliminary data from the Office for National Statistics (ONS) revealing GDP growth of just 0.1%. This marks the weakest quarterly expansion since early 2023 and a notable deceleration from the 0.3% growth recorded in Q3. The slowdown was broad-based, with monthly data for December showing a 0.8% contraction in manufacturing output and stagnant 0.0% growth in the services sector, the economy's largest component.
The anticipated economic weakness is largely attributed to the Bank of England's sustained high-interest rate policy, which has maintained the Bank Rate at 5.25% in an effort to combat inflation. This restrictive monetary stance has dampened consumer spending and business investment. Although inflation is easing, it remains above the central bank's 2% target, continuing to erode household disposable income.
Financial markets have reacted decisively to the weak data, dramatically increasing bets on imminent monetary policy easing. Analysis of interest rate futures now indicates an 85% probability of a 25 basis point rate cut by the Bank of England in March 2025—a sharp increase from a 40% chance priced just one month prior. The yield on two-year UK government bonds has fallen by 30 basis points following the GDP release.
Market expectations are being shaped by a confluence of factors beyond weak growth, including consistent progress on inflation, a softening labor market with unemployment rising to 4.3%, and signals from other major central banks like the Federal Reserve and European Central Bank about potential policy shifts. The Bank of England's Monetary Policy Committee faces a delicate balancing act, with members publicly divided; external member Dr. Swati Dhingra has advocated for earlier cuts while Governor Andrew Bailey maintains a more cautious, data-dependent stance.
Looking ahead, the focus shifts to the potential for a policy pivot in 2025. The upcoming February inflation report and labor market data will be critical for the March decision. Economic projections for 2025 remain modest, with the Office for Budget Responsibility anticipating 0.8% growth and the International Monetary Fund projecting 1.0% expansion, both predicated on some degree of monetary easing during the year.
