After a modest uptick in economic activity in November, the UK economy continues to struggle as it grapples with underlying challenges. Rising energy costs, low productivity and global uncertainties are all contributing to a fragile recovery. Despite small improvements in certain sectors, including IT and construction, concerns about a slump in business confidence and rising tax burdens are weighing heavily on the outlook.

As the impact of October's Budget continues to ripple through the economy, and with global market jitters adding to the instability, what do the latest trends suggest about the UK’s path forward in 2025?

Underwhelming return to growth for the UK economy

Official figures revealed that the UK economy grew by 0.1% in November, after contracting in September and October. This increase was driven by stronger activity within wholesaling, pubs and restaurants, IT and construction, which was partly offset by falls in output from accountancy, business rental and leasing and industrial firms.

In the three months to November 2024, UK GDP – a better measure of the underlying trend – showed no growth, compared with the previous three-month period. November’s monthly uptick is unlikely to have sparked a more notable improvement in economic activity across the fourth quarter with the damage to confidence from the October Budget and global uncertainty expected to have suppressed activity in December.

Business confidence drops to two-year low

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – put sentiment at just 0.2 on the index, the weakest reading since Q4 2022 and down from 14.4 in the previous quarter (see Chart 1). This decline in confidence reflected record concerns over the tax burden and weaker domestic sales growth. Drops in confidence were recorded in every sector of the economy, with retail and wholesale businesses hardest hit.

Tax worries set new survey record after October Budget

ICAEW’s latest BCM also revealed that the number of businesses reporting the tax burden as a growing challenge hit a record high at 41% in Q4 (see Chart 2), a significant increase on 29% in Q3 and the first time that tax worries have been the most cited challenge in the BCM’s history.

Concerns were partly a reflection of changes to employers’ national insurance (NI) in the Budget, with the reduction in the NI threshold a particularly unwelcome surprise. Regulatory concerns remain a key challenge to business with these worries most prevalent in the Banking, Finance and Insurance sector.

Inflation’s temporary reprieve

UK CPI inflation surprisingly dropped from 2.6% to 2.5% in December 2024, although still decisively above the Bank of England’s 2% target. This decline was driven by the downward pressure on the headline rate from lower hotel prices and the cost of tobacco, which was partly offset by the rising cost of fuel and second-hand cars.

Despite December’s decline, the near-term outlook for UK inflation remains ominous with higher energy bills likely to push the headline rate above 3% over the coming months, aided by the expected increase in Ofgem’s energy price cap in April.

Retail sales subsided at the end of 2024

Retail sales in Great Britain fell by 0.3% in December 2024 (see Chart 3), down from the 0.1% growth in November. This decline in sales was partly driven by a very poor month for food sales, which fell by 1.9% to their lowest level since April 2013. The monthly fall was strongest within supermarkets, but sales also fell notably in specialist food stores (such as butchers and bakers), and alcohol and tobacco stores.

In contrast, clothing and shoe shops saw sales rise by 4.4%, with these businesses reporting strong Christmas trading. Across the fourth quarter, retail sales volumes fell by 0.8%, mirroring the major downturn in sentiment within this sector highlighted in ICAEW’s latest BCM.

Recent weeks have also seen significant financial market turmoil as the cost of government borrowing rose sharply amid a global sell-off of government bonds (known as gilts) and a rise in bond yields (the interest rate paid to those holding gilts). At one-point, 10-year gilt yields rose to their highest in 17 years, while 30-year yields rose their highest since the late 1990s.

Beyond the political noise, the recent volatility has largely reflected international factors, including President Trump’s economic plans and rising oil prices. That said, October’s Budget was an aggravating factor with international investors concerned about the UK’s rising debt levels, low growth and persistently high inflation.

Implications for accountants, business owners and the economy

Taken together, these figures suggest that the UK’s economic prospects remain under pressure from dramatic damage to confidence from October’s Budget and heightened global uncertainty. A key lesson from this month’s financial market turbulence is the need to better address UK’s longstanding economic challenges, such as poor productivity and persistent supply side constraints, to help insulate us against these external shocks.

UK economy – what to watch for this month:

1. On 6 February, the Bank of England’s Monetary Policy Committee is likely to cut interest rates from 4.75% to 4.50%.
2. The quarterly GDP data to be released on 13 February will confirm whether the UK economy stagnated again in the final quarter of 2024, following zero GDP growth in Q3.
3. The inflation figures for January out on 19 February should see an increase in the headline rate from 2.5% in December.