The UK's economy demonstrated unexpected resilience in the fourth quarter of 2024, expanding at an annual rate of 1.4%, surpassing the market expectation of 1.1%. Inventory restocking played a pivotal role as the primary growth driver, while net trade detracted from overall performance. Meanwhile, trade tensions are escalating, with the US imposing a 25% import tax on steel and aluminium, bringing Europe into the fray.
In December, real GDP grew by 0.4%, exceeding the consensus of 0.1%, following a 0.1% increase in November. This growth was primarily fueled by the service sector, although quarterly figures showed a modest rise of 0.1% from Q3, defying predictions of a contraction.
"Monthly real GDP grew 0.4% in December (consensus: 0.1%) vs. 0.1% in November largely driven by growth in the service sector. On a quarterly basis, preliminary real GDP unexpectedly rose 0.1% q/q (consensus: -0.1%) vs. 0% in Q3 but the details were unimpressive." – BBH's FX analysts
Despite this optimism, significant challenges persist. The Bank of England's macroeconomic outlook suggests near-term stagflation, with expectations for Q1 2025 indicating real GDP growth of only 0.1% quarter-on-quarter and CPI inflation at 2.8% year-on-year.
"Beyond Q4, the Bank of England’s (BOE) macroeconomic projections point to near-term stagflation conditions which is a drag for GBP. For Q1 2025, the BOE forecasts real GDP at just 0.1% q/q and CPI inflation at 2.8% y/y." – BBH's FX analysts
Inventory restocking emerged as a critical driver of growth amid a backdrop of weak household expenditure and declining gross fixed capital formation. The UK faced headwinds from net trade, which acted as the most significant impediment to economic expansion.
"There was no growth in real household expenditure and gross fixed capital formation fell. Inventory restocking was the main growth driver while net trade the biggest drag." – BBH's FX analysts
Financial markets reflect these dynamics as the GBP/USD pair experienced fluctuations, trading near 1.2500 in the European session on Thursday before briefly recovering above and then falling back below this level. The broader foreign exchange environment saw the EUR/USD pair remain strong above 1.0400.
In addition to currency movements, the BTC price consolidated below the $100,000 mark on Thursday, highlighting ongoing volatility in cryptocurrency markets.
As trade tensions simmer, uncertainty looms over potential impacts on European economies. The US's recent imposition of tariffs on steel and aluminium imports marks an escalation that could affect global trade dynamics.