After a brief rebound in December, the UK economy remains fragile, with growth failing to translate into higher living standards. While sectors such as hospitality and manufacturing showed signs of recovery, business investment has weakened, inflation is climbing again, and wages, despite rising, are struggling to keep pace with the cost of living.

A key concern now is ‘stagflation’ – a damaging mix of weak growth, rising unemployment and persistent inflation. This combination makes it harder for policymakers to respond effectively, as tackling inflation with higher interest rates risks deepening the economic slowdown. With businesses cautious and consumer confidence shaky, what do the latest trends suggest about the UK’s path forward in 2025?

Living standards fall despite return to growth for UK economy

Official figures reveal that the UK economy grew by 0.1% in the final quarter of 2024 (see Chart 1), after flatlining in the previous quarter. The return to growth was driven by a strong December, where UK GDP grew by 0.4% as a range of industries, from pubs and bars to machinery manufacturers, saw a notable pick-up in activity. For 2024 as whole, the UK economy grew by 0.9%, up from growth of 0.4% in 2023.

Despite this improvement, GDP per head (which divides UK GDP by the total UK population), a key indicator of living standards, dropped by 0.1% in 2024. A reason why the UK economy grew in 2024, but living standards didn’t, is that the pick-up in overall GDP partly reflected strong population growth.

Business investment fell in the final quarter 

Detailed official data show that the rise in UK GDP in Q4 2024 masked notable differences in performance across the economy. In output terms, the services sector increased by 0.2%; construction also grew, by 0.5%; while production fell by 0.8%. While business investment is estimated to have fallen by 3.2% in Q4 2024, it increased by 0.8% across 2024, compared with 2023.

Disheartening rebound in UK inflation

UK consumer price inflation (CPI) stood at 3.0% in January 2025, the highest rate since March 2024 and up from 2.5% in December (see Chart 2). The increase was largely driven by the introduction of VAT on private school fees, which meant overall fees rose 12.7% in the month, and rising air fares. Food inflation also rose sharply to 3.3% in the year to January, from 2% in December 2024. In the coming months, the only way will be up for inflation, with higher energy costs and national insurance from April, and global trade frictions likely to lift the headline rate close to 4% by the summer.

Fault lines in UK labour market widening

UK unemployment rose by 48,000 in the three months to December 2024, compared with the previous three-month period. The number of job vacancies, a good indicator of labour demand, dropped for the 31st successive period, falling by 9,000 in the three months to December 2024. In contrast, UK regular pay growth (excluding bonuses) was 5.9% in the three months to December 2024, up from 5.6% in the previous three months and the fastest growth since the three months to April last year. With UK inflation currently rising more slowly than wages, pay growth in real terms is accelerating. Real regular pay grew by 3.4% in the latest period (see Chart 3).

UK interest rates cut to 4.5%

The Bank of England cut interest rates from 4.75%, to 4.5%, the lowest level since June 2023, but still well above the average over the past 10 years of 1.32%. The Monetary Policy Committee (MPC) members voted 7-2 in favour of this outcome, with the two dissenters voting for a cut of 50 basis points to 4.25%. The nature of this vote split suggests that concerns among rate setters over the UK’s struggling economy are currently outweighing worries over rising inflation. However, while this cut may lift morale, it is unlikely to sufficiently alleviate the challenging financial position faced by many people and businesses, as only slight inroads have been made into reversing the previous period of significant rate hikes.

Bank of England halves growth forecast

The Bank of England also released its quarterly Monetary Policy Report, which revealed that the Bank has lowered its GDP growth forecast for the UK economy from 1.5% to 0.75% for this year, before expecting growth to accelerate to 1.5% by 2026 and 2027. It also predicts that inflation will rise to 3.7% later in 2025, driven up by rises in gas prices and increases in the cost of energy, water and bus fares. The looming increase in employers’ national insurance contributions is expected to push the unemployment rate up, rising to 4.8% over the next year, higher than previously forecast. The Bank’s latest Monetary Policy Report also suggests that artificial intelligence advancements could ‘boost’ global productivity, increasing capital demand and pushing up real interest rates in the UK.

Implications for accountants, business owners and the economy

Taken together, these figures suggest that despite the better than expected end to 2024, the big picture remains one of stagnation amid the loss of confidence following the budget, and longstanding difficulties, including poor productivity. With the Bank of England’s latest forecasts suggesting that stagflation is a growing risk, the path to future interest rate cuts is likely to become more treacherous.

UK economy – what to watch for next month

1. The January 2025 UK GDP data to be released on 14 March is likely to show that economic activity slowed, following a strong December.
2. On 20 March, the Bank of England’s Monetary Policy Committee will probably keep interest rates on hold at 4.5%.
3. The inflation figures for February out on 26 March should see the headline rate rise slightly higher from the 3% recorded in January.