After a strong start to the year, low productivity, supply shortages and rising energy costs have begun to weigh on the UK’s economic performance. Global uncertainties including trade tensions and higher energy prices are compounding these challenges, resulting in an increasingly uncertain economic outlook. With further interest rate cuts in 2024 or early 2025 also in doubt, what do the latest figures highlight as the priorities to address?

UK economic growth slows sharply

Following a strong first half of the year, the third quarter UK GDP outturn paints a more realistic picture of the UK’s underlying growth trajectory, given longstanding challenges over poor productivity and persistent supply side constraints.

Official figures revealed that the UK economy grew by 0.1% in the third quarter of 2024, down sharply from growth of 0.5% in the previous quarter (See chart 1). This means that the UK will have been the second slowest growing economy of any G7 country in Q3. While retail and construction firms enjoyed a strong quarter, this was largely offset by falls in output from telecommunications and wholesale sectors. In September alone, UK GDP contracted by 0.1% as the services sector showed no growth and industrial output fell.

Productivity falls, despite investment boost

Business investment rose by 1.2% in Q3 2024, following growth of 1.4% in the previous quarter. Business investment is estimated to have increased by 4.5%, compared with the same quarter a year ago, the highest growth since Q1 2023.

However, productivity – as measured by output per hour worked – fell by 0.8% in Q3 2024, the biggest decline since Q4 2023. In annual terms, UK productivity dropped by 1.8% in Q3. Over the past year, the education sector made the largest upward contribution to productivity growth, (see Chart 2), while the real estate industry was the biggest drag. 

Notable revival in UK inflation

UK CPI inflation rose from 1.7% to 2.3% in October 2024, the biggest increase in the headline rate since October 2022. This resurgence in inflation was driven by the 10% increase in Ofgem’s Energy Price Cap, which meant higher costs for gas and electricity compared with a fall at the same time last year.

Electricity prices rose by 7.7% in October, having fallen by 7.5% last year. Gas prices increased by 11.7% in October, compared with a 7% drop last year. The largest downward pressure on headline inflation came from falls in price pressures from recreation and cultural activities, including live music and theatre ticket prices.

Inflation is expected to drift gradually higher over the coming months with rising energy bills, the impact of the Budget and global trade frictions likely to keep the headline rate hovering above the Bank of England’s 2% target until well into 2025.

UK interest rates cut to 4.75%

Despite the Bank of England cutting interest rates from 5.00%, to 4.75% on 7 November, they remain well above the average over the past 10 years of 1.32%. The 8-1 vote split of Monetary Policy Committee (MPC) members in favour of this outcome suggests that the decision to cut rates was emphatic. However, the rather cautious tone of the meeting minutes suggests that a further interest rate cut at the MPC’s next policy decision on 19 December is unlikely, particularly given greater global uncertainty and October’s jump in inflation.

Even though interest rates have further to fall, the upward pressure on inflation from the Budget and growing global risks, including possible new US tariffs, could mean that policy is loosened more modestly than many anticipated.

Businesses thinking of raising prices due to higher labour costs

The Business Insights and Conditions Survey from the Office for National Statistics (ONS) looked at which, if any, factors were causing businesses to consider raising prices in December 2024. For businesses with 10 or more employees, the top reason reported for doing so were labour costs (39%), up nine percentage points from November 2024 (see Chart 3), followed by energy prices (20%) and raw material costs (16%). Several businesses that reported labour costs were a concern in the survey commented they would be affected by increases in employer National Insurance contributions.

Unemployment rate rises

The UK unemployment rate rose to 4.3% between July and September 2024, up from 4.2% in the previous three-month period. Following decreases in the unemployment rate since late 2013, the unemployment rate increased during COVID-19. While it fell again from early 2021 until mid-2022, the unemployment rate has generally been rising since then.

The number of people unemployed for up to six months had been falling since Q3 2023, but increased in the latest quarter. Those unemployed for more than six months also increased in the latest quarter. Regular wage growth (excluding bonuses) rose by 4.8% in annual terms, the lowest rate since June 2022. While wage growth including bonuses, picked up to 4.3% from 3.8%, this largely reflected one-off payments made to the civil service last summer.

Implications for accountants, business owners and the economy

Taken together, these figures suggest that the UK economy is in a more challenging period as domestic and global headwinds rise. As such, economic growth in the final quarter of this year is likely to be modest with looming tax rises and growing global uncertainty likely to spark a renewed restraint to spend and invest, despite lower interest rates.

UK economy – what to watch for this month:

1. The GDP data, to be released on 13 December, is likely to show that the UK economy returned to modest growth in October.
2. The next inflation figures for November due out on 18 December is likely another, albeit modest, rise in the headline rate.
3. October’s rise in inflation probably means that interest rates will be kept on hold when the next decision is made on 19 December. The voting split and the tone of the MPC meeting minutes will be watched closely for clues over the likelihood of rate cuts early next year.