The UK economy experienced a modest growth of 0.1% in the final quarter of 2024, according to recent data. The Office for Budget Responsibility (OBR) has projected a 2% growth for the UK in the current year. However, concerns linger as the GDP per capita saw a slight decline throughout the year, raising questions about the sustainability of this growth. The OBR is set to release new forecasts in line with the Spring Statement on March 26, which are not expected to deviate significantly from previous projections.
In the fourth quarter, the UK economy expanded at an annual rate of 1.4%, surpassing market expectations of 1.1%. Despite this positive development, the Treasury's fiscal 'headroom'—the surplus funds after meeting fiscal rules—has dwindled. As of October, this headroom was merely £10 billion, and it is likely to have been further eroded by weaker growth and higher market rates. The fiscal landscape is becoming increasingly sensitive to investor sentiment, as highlighted by January’s gilt sell-off.
The OBR's upcoming forecast changes, while important, are not anticipated to be substantial. The UK had a reasonable economic performance in 2024; however, most of this strength was concentrated in just a few months. Growth during this period can largely be attributed to population increases rather than broad-based economic expansion. This poses a challenge for the Treasury, which must balance immediate fiscal realities with long-term projections.
The UK's fiscal position remains concerning, with deficits around 4% and significant gilt issuance plans that challenge the government's fiscal rules. There is a risk that the Treasury may focus more on addressing these immediate issues rather than considering the projected fiscal scenario five years down the line. This short-term focus could impact strategic financial planning and economic stability.
On a brighter note, the Pound Sterling has shown resilience, benefiting from an improving risk mood and positive economic data from the UK. Meanwhile, the EUR/USD remains stable, maintaining a strong position above 1.0400 during Thursday's European session. These currency movements reflect a cautious optimism among investors regarding the UK's economic outlook.