The UK economy grew by 0.4% in December, easing recession concerns. GDP increased by 0.1% in Q4 2024, primarily driven by the services sector. While this improved from previous forecasts, asset managers remain cautious about the road ahead.
While the GDP figures were a positive surprise compared to consensus estimates, they are unlikely to significantly shift the market’s perception of the UK’s growth trajectory, according to Patrick O’Donnell, senior investment strategist at Omnis Investments. “I don’t think the market will materially reassess the growth trajectory of the UK economy today, and the market moves shouldn’t be material,” he said, adding that revised forecasts from the Bank of England and OBR signal the need for potential spending cuts or tax increases to maintain fiscal discipline.
Rob Morgan, chief investment analyst at Charles Stanley, remarked that while the numbers provide a small win, challenges remain. “It is not a time for victory laps certainly, and the danger of recession hasn’t gone away, but relative to expectations this is a win for the Chancellor,” he said. He noted that concerns over a weak festive trading period did not materialise, which has offered some stability for the government.
However, Morgan also warned that the UK economy is far from out of the woods. “While these numbers are better than feared, we must remember that economic resilience remains fragile. Businesses are still grappling with elevated borrowing costs, and consumer confidence remains shaky amid ongoing employment concerns,” he explained. He also pointed to structural constraints, such as a lack of skilled workers in key sectors, which could hinder future growth efforts. “The boost to government spending should provide a temporary uplift, but sustaining momentum will require addressing deep-rooted challenges, including labour shortages and declining productivity,” Morgan added.
Long-term economic improvement will require more than just short-term GDP gains, according to Benjamin Craig, associate director of R&D incentives at Ayming UK, who stressed the need for targeted investment. “SMEs are the lifeblood of the UK economy, but many are struggling to absorb the impact of tax burdens like the National Insurance hike,” he said. He argued that while the Chancellor’s pension fund reforms are a step in the right direction, the government must prioritise high-growth areas like green technology and manufacturing to drive sustainable economic expansion.
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Looking ahead, policymakers will have to navigate competing fiscal pressures. Lindsay James, Investment Strategist at Quilter Investors, highlighted the difficult choices facing the government. “The most sensible choice would seemingly be to address the current fiscal rules, which mean that what is in essence a fairly immaterial shortfall will trigger spending cuts on already decimated public services,” she explained. However, with tax hikes ruled out, spending cuts may be the only viable option unless these rules are adjusted. “The Treasury’s mantra of ‘non-negotiable fiscal rules’ suggests that a fiscal rethink is unlikely before 2026/27, when a tolerance of +/-0.5% of GDP will be introduced to prevent the rigid budgetary constraints currently in place,” she added.
James also pointed out that Chancellor Reeves faces a delicate balancing act. “The government has consistently reiterated its commitment to fiscal discipline, yet cutting spending on public services at this juncture risks stifling growth just as the economy begins to stabilize.”
She also noted that broader external risks could complicate economic recovery. “The impact of US tariffs is one of the largest risks, as even if British goods are not targeted, many British firms contribute to global supply chains that will be affected. Higher energy costs, with European natural gas recently hitting two-year highs, also pose a serious threat to both businesses and households, putting additional pressure on inflationary trends,” James explained.
Despite the challenges, there’s cause for optimism. UK equities have started 2025 on a stronger footing, outperforming US markets. “This reflects the benefit of international revenues, providing a clear reminder that diversification remains crucial for investors,” James noted.
While falling interest rates have provided relief, inflationary pressures could persist due to rising energy costs and potential US tariffs that may disrupt global supply chains. “The impact of US tariffs is one of the largest risks, as even if British goods are not targeted, many British firms contribute to global supply chains that will be affected,” James warned.
