The UK economy edged up in December following a previously flat second half of the year.
Having slumped to no growth in the third quarter, a 0.1% increase was confirmed for the final three months of the year driven by expansion in services on Thursday.
It provides some rare relief for Chancellor Rachel Reeves as economists had previously expected a slight contraction for the month, which would have meant the economy came within a whisker of recession.
While not setting the world alight, the year-on-year figure for economic growth of 1.5% is respectable given the challenges of higher inflation and interest rates.
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.
Concerns of a weak festive period did not transpire, and it offers something to build on this year.
Can growth accelerate from here?
Overall, it appears likely there will be a continued small improvement, at least in the short term. Consumers and businesses will continue to benefit from falling interest rates with three cuts made in the past six months or so. The boost to government spending should also provide a temporary uplift.
It is likely to prove a struggle though. Many government initiatives including housebuilding and infrastructure investment could be hamstrung by a lack of construction and other skilled workers. Meanwhile, consumer confidence and spending could be jeopardised by a deteriorating employment picture, plus some businesses are expected to retrench following Budget measures that involve higher employment costs.
The direction of inflation also hangs in the balance with higher energy prices, the impact of elevated employment costs and the wildcard of US tariffs still to unfold. It likely adds up to a lacklustre scenario without concerted efforts to break the cycle of low growth and high government borrowing costs.
What does it mean for interest rates?
The economic environment is still fragile and the Bank of England won’t be having any regrets about last week’s decision to cut interest rates. Its greater focus on the growing risks to growth is still very much warranted.
However, lingering economic resilience reduces the likelihood of a back-to-back cut coming in March and turns the focus more to inflationary pressures that may prove difficult to flush out of the system
