The UK economy has experienced a significant downturn, stagnating since the controversial budget announced in October. In contrast, the US economy continues to grow, albeit at a slower pace compared to the initial half of 2024. The UK saw its economy contract by -0.1% in January, following a robust 0.4% growth in December. This recent decline underscores the challenges faced by the UK in navigating post-budget economic headwinds.
The most pronounced slowdown within the UK economy has been observed in the accommodation and food services sector, which plummeted by 2.4% in January after witnessing a modest 0.9% growth in December. Despite an increase in food store sales, spending at pubs and restaurants fell by 2.1% during the same period. These figures reflect shifting consumer behaviors and economic pressures that are influencing spending patterns across the nation.
Production output in the UK also saw a downturn, falling by 0.9% in January. A sharp decline of 3.3% was noted in the mining and quarrying sector, with crude oil and natural gas extraction contracting by 3.7%. Manufacturing output decreased by 1.1%, driven by declines in the manufacture of base metals and metal products. Additionally, the production of basic pharmaceutical products and preparations suffered due to rising energy costs, adding further strain to an already beleaguered sector.
The UK government is now confronted with a difficult decision: whether to raise taxes further or reduce public spending. This predicament comes amid soaring borrowing costs and mounting fiscal pressures. The UK 5-year gilt surged above 4.3% after initially declining alongside its US counterpart. Meanwhile, the US 5-year yield, which briefly dipped below 4% at the start of the month, rebounded to its current level of 4.07%.
In January, both the UK 5-year gilt and the US 5-year yield were at an equal level of 4.61%. However, as economic conditions evolve, these financial instruments have diverged slightly, reflecting differing economic trajectories and fiscal policies between the two nations.
UK consumers are bracing for an average annual cost increase of £600 from April as various service prices rise. This surge in living expenses further exacerbates the financial burden on households already grappling with economic uncertainties. The UK's borrowing costs had been closely aligned with US treasuries until recent shifts underscored divergent economic landscapes.
The UK's economic challenges are compounded by global factors impacting various sectors. Rising energy prices have not only affected manufacturing but have also contributed to broader inflationary pressures that are affecting consumer spending and business investment decisions.