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This morning’s UK GDP figures were marginally better than expected, with the economy growing by 0.1% QoQ in the final three months of 2024.
That said, such an anaemic pace of economic growth is hardly worth celebrating, and doesn’t materially alter the UK economic outlook.
The new year has already got underway in rather soft fashion, as business and consumer confidence both remain subdued, and with the spectre of further tax hikes, or Government spending cuts, looming large in the late-March ‘Spring Statement’.
Furthermore, risks to the outlook tilt clearly to the downside, particularly with businesses set to be battered by April’s sharp rise in National Insurance contributions.
Despite being better than expected, momentum remains dismal, and the Q4 GDP figures reinforce my base case for 2025 to be a year of ‘stagflation’ for the UK economy, experiencing little-to-no economic growth, and stubbornly high inflation, which the Bank of England now see peaking at almost 4% this autumn.
Against such a backdrop, policymakers are unlikely to be able to ease policy more rapidly, or more substantially, than the gradual and predictable pace of one 25bp cut per quarter that has been seen so far this cycle. My base case remains that Bank Rate will end the year at 3.75%, with three further reductions being delivered, at meetings which coincide with the release of updated economic projections.
In fact, it would be folly for policymakers to move to normalise policy more rapidly, with such a move heightening the risks of embedding the present elevated level of inflation within the economy. The MPC would be well-served to remember that their mandate is to ensure inflation returns to the 2% target, and not to slash rates in an attempt to prop up ailing economic growth, in an effort to make up for the Government’s fiscal ineptitude.
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