The UK economy appears to have emerged from the abyss after November’s revised GDP figures showed it grew slightly, 0.1% compared to the previous month.
The news was welcomed by the financial markets, with the FTSE 100 last up 54 points at 8,355 during early trade on Thursday.
November’s GDP data had fallen short of expectation, but services and construction grew despite a fall in UK manufacturing.
Matt Britzman, an analyst at Hargreaves Lansdown, told Reuters that the positive data could mean that the Bank of England will choose to cut rates next month by 25 basis points.
But Lindsay James, an investment strategist at Quilter Investors, said that while the risk of recession remains modest for now, the UK is not yet out of the woods, and in the three months to November the economy flatlined.
James said weak growth could be attributed to the Chancellor Rachel Reeves’ maiden budget in October, when she unveiled rises in tax and hike in the National Insurance rates paid by employers pay.
The expert said: “As we move further into this year, we could see an even bigger impact. Businesses will soon feel the effects of increased national insurance contributions, the costs of which are likely to be passed on to employees. Wage growth is expected to take a hit, and spending could be dampened further as a result.”
James said with Donald Trump’s inauguration as US president nearing, the true effects of his policies will start to be felt later in the year.
She continued: “Hopefully, the UK will be relatively sheltered from the impact of his anticipated tariffs compared to some of its peers, but there is still a great degree of uncertainty on the horizon.
“Generally speaking, markets have been sceptical about the prospect of further rate cuts in the UK in the early part of this year, and less than two quarter-point cuts are being priced in for the full year.
“The Bank of England stood alone in its decision to hold rates in December while the ECB and Federal Reserve forged ahead with cuts. However, should the economy fail to pick up at least some momentum and the UK falls into a recession, it may be forced to change tack.
“It appears the Chancellor has a large task ahead, given she is banking on growth to drive the economy.”
The rise in GDP may allow the Bank of England some more wiggle room when it comes to reducing the base rate, but there are other factors that savers and borrowers may need to factor in when spring-cleaning their finances.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said investors can take some comfort in the fact UK stocks and gilts rallied on the news.
She said: “Whether the improving growth picture will continue remains unclear as the road ahead is littered with potholes. December’s unexpected inflation dip has seen traders ramp up bets on the BoE pushing ahead with another rate cut next month – a move that would be welcomed by borrowers hoping for some respite from high mortgage and debt repayments.”
Inflation remains under pressure said Haine saying: “Not only from higher energy prices but the tax hikes imposed on businesses in Reeve’s Budget, which are set to take effect from April.”
“Employers must not only absorb an increase in employee national insurance rates but also a rise in the minimum wage with major businesses already warning of plans to pass some of that cost to consumers by hiking prices.”
She added: “There may also be implications for job security and pay growth as employers reevaluate staff costs for 2025. Signs of trouble are already evident with job vacancies continuing to slide, business confidence in tatters and redundancies on the rise. If employers continue to trim staffing levels, instigate hiring freezes or look to rein in pay rises to offset rising costs, this could have negative consequences on the health of the economy.”
Spend less
The expert advised: “Consumers worried that household costs may edge up again in the coming months may adopt a more cautious approach towards spending.”
Pay off debts
If the BoE does push ahead with a third interest rate cut next month, this could relieve some of the pain for consumers, but with inflationary pressures still lingering, the outlook for personal finances remains uncertain.
Make sure you fix your mortgage
Mortgage rates have been volatile since the Budget amid shifting interest rate expectations and the cost of servicing loans, credit cards and overdrafts remains high.
Don’t bank on a bonus or pay rise
Haine also said: “Those hoping for a bumper end of tax year pay rise or bonus may be disappointed as companies hold back in a bid to keep costs down. It means pay growth may suffer in the coming months at a time when household budgets are still reeling from a protracted period of higher living and borrowing costs following the pandemic. Add in the hit from the long freeze to personal tax thresholds and more people will find themselves paying higher rates of tax as their income increases.”