The Bank of England looks set to resume cutting interest rates next month after official data revealed weaker inflation and anaemic economic growth.
Economic output expanded by just 0.1 per cent in November, the Office for National Statistics said on Thursday, missing forecasts of 0.2 per cent but marking a return to growth after two consecutive months of contraction.
Growth, which looks to have flatlined in the second half of 2024, was driven by the services and construction industries, which offset a third consecutive monthly decline in manufacturing output.
Expectations for the pace and scale of BoE base rate cuts were gradually revised ever lower in the second half of last year as strong wage growth and services inflation weighed on the bank’s mission to return the consumer price index to its target of 2 per cent.
CPI, which has remained above target for several months, fell from 2.6 per cent in November to 2.5 per cent in December.
The bank opted for two rate cuts of 25 basis points each last year, taking base rate to its current level of 4.75 per cent by the end of 2024.
Luke Bartholomew, deputy chief economist at abrdn, said: ‘With inflation coming in softer yesterday, the ongoing weakness in growth will further tip the Bank of England towards easing again at its next meeting in February.’
However, he cautioned it was ‘hard to see’ the bank ‘shifting away from its ‘gradual’ mantra’ to ‘a more rapid easing cycle’.
Pressure on the BoE to cut base rate again as growth stumbles
Traders now expect to see between two and three quarter-point cuts in 2025, taking base rate at low as 4 per cent by year-end.
BoE Governor Andrew Bailey has been vocal in his concerns about the potential for a return to sky-high inflation.
Will 2025 mark yet another year of weak growth?
Thomas Pugh, UK economist at RSM UK, agreed that the combination of weaker-than-expected inflation and economic growth ‘means an interest rate cut in February is now a sure bet’.
He noted the improved performance of consumer-facing businesses, which suggests Britons ‘are gradually getting more comfortable spending again’.
However, Pugh cautioned the economic outlook for this year remains precarious.
He said: ‘There are still good reasons to expect growth to pick up this year.
‘The increase in government spending and investment announced in the Budget should start to flow through and the early signs of a revival in consumer spending should continue.
‘But the lack of momentum going into the year raises the risks that 2025 under performs expectations.’
The most recently available forecasts published by HM Treasury shows the City expects inflation and GDP growth to average 2.5 and 1.3 per cent respectively in 2025.
Services and construction industries offset another manufacturing decline
UBS, HSBC and HSBC look to be the most bullish on GDP performance, predicting 1.5 per cent growth, while JP Morgan looks most bearish with a forecast of just 0.8 per cent.
The Office for Budget Responsibility forecast 2025 growth of 2 per cent in October.
Scott Gardner, investment strategist at JP Morgan-owned Nutmeg, said weak sentiment towards the UK ‘represented by recent instability across financial markets’ could ‘provide a headwind’ to the country’s growth ambitions.
He added: ‘Despite this change in sentiment, the outlook for the UK is bright with the economy predicted to grow quicker in 2025 than European peers including France and Germany.
‘A potential uplift in housing market activity in the lead up to the April stamp duty changes could provide a tailwind for the economy.
‘While we remain in ‘wait and see’ mode ahead of potential US trade tariff announcements, if they come to pass, they are expected to have a larger impact on the UK’s European neighbours.’
City forecasts for 2025 GDP growth
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