The UK economy began 2025 on a lackluster note, with economic output in January declining by 0.1%. This dip followed a relatively strong December, where economic growth was recorded at 0.4%. The figures bring into question the optimism displayed by the Office for Budget Responsibility (OBR), which had forecasted a 2% growth for the year—a prediction now appearing overly ambitious. As the government balances spending cuts and potential tax increases, economic growth remains a focal point for policymakers.
The Treasury has responded to the slow start by significantly boosting day-to-day spending in early 2025. However, it is anticipated that some of this spending increase will be rolled back in the forthcoming Spring Statement later this month. The government is caught in a tight spot, needing to stimulate growth while managing fiscal constraints that might include spending cuts and tax hikes later in the year.
Meanwhile, the Bank of England appears to be maintaining its current policy stance ahead of its meeting next week. The recent data, including January's disappointing performance, has not prompted any substantial policy shifts. This steady approach comes amidst a particularly challenging period for manufacturing—a sector that has seen growth in only one of the past five months. Car production, in particular, has been a significant factor in this sector's weakness.
Looking forward, one major uncertainty looms over the UK economy: the impending tax hike on employers. Set to take effect next month, this increase could have profound implications for the job market. A spike in layoffs could potentially alter the growth outlook for 2025 and influence monetary policy decisions.