UK economy disappoints despite return to growth

The UK economy has returned to growth for the first time after three months of contraction, but the growth was lower than expected. The economy grew slightly by 0.1% in November, mainly driven by trade growth in pubs, restaurants, and the construction industry. This follows contractions in both October and September.

The data was released after recent turmoil in financial markets, which led to UK borrowing costs rising to their highest levels in years and a fall in the value of the pound. However, with tax policies due to take effect in April, the weak growth has further fueled concerns that the UK’s economic stagnation may persist for some time.

Chancellor Rachel Reeves has come under intense pressure after market turmoil threatened her economic plans. She admitted the government must “do more to promote growth” and reiterated that she would improve economic growth “faster and deeper” to raise living standards. Prime Minister Keir Starmer added that economic growth “always takes time” but that the November growth was “a step in the right direction.”

The November economic data is the first since Reeves’ initial budget, in which she announced a £40 billion tax increase plan, including raising national insurance rates and lowering the threshold for employers. Ahead of the tax increases taking effect in April, businesses have repeatedly warned that the additional costs they face, as well as increases to the minimum wage and reductions in business tax relief, could affect the economy’s ability to grow. Employers are expected to reduce cash available for pay rises and creating new jobs.

The UK economy saw no growth in the three months to November, according to estimates from the Office for National Statistics (ONS). The economy has only grown twice since Labour came to power. AJ Bell’s head of financial analysis, Danni Hewson, said the bigger economic picture is that “the economy is still firmly stuck in the mud.” The Confederation of British Industry’s (CBI) chief economist, Ben Jones, said “a sense of caution appears to have gripped UK businesses.” Liz Martins, senior economist at HSBC, said: “It’s been a pretty bleak start to the year. We’re not in a recession, but there’s not much growth either.”

To turn things around, Reeves will meet with representatives from some of the UK’s largest regulators, including energy regulator Ofgem and the Competition and Markets Authority, to seek advice on boosting economic growth. It is understood that Reeves decided to meet them in person, rather than wait to read submitted material, with a Treasury source describing the meetings as a “sharp wake-up call.”

The ONS said that the construction and service sectors drove the marginal growth in November. Construction was mainly driven by new commercial development projects, but Liz McKeown, director of economic statistics at the ONS, said that production continued to fall across multiple manufacturing and oil and gas extraction companies. “The service sector saw a small increase, with wholesale, pubs, restaurants, and IT companies doing well, but this was partially offset by declines in accounting, commercial leasing, and rental industries,” she added.

The ONS releases monthly economic data. However, quarterly data, which covers three months, is considered more important. Following the release of the data, the pound fell, trading at $1.221, down 0.2% on the day. Long-term government borrowing costs remained stable.

Adrian Haller, head of the UK division of Swiss high-speed press manufacturer Bruderer, is preparing to open a new factory in Telford, Shropshire, after planning it for 10 years. But he said the budget “put a dampener on businesses” and that some of his biggest customers had become more cautious after the news of increased employer national insurance contributions. “As a result, they have reduced their interest in placing orders with companies like ours,” he added. “Everyone seems to have put the brakes on,” he said. “I just ask the government to listen to what we have to say and the fact that they are changing too much too quickly, which makes it hard for us to survive.”

Economic growth usually means that people spend more, more jobs are created, more taxes are paid, and workers get better pay rises. When an economy shrinks, it can lead to businesses cutting back on investment and jobs. Rob Wood, chief UK economist at Pantheon Macroeconomics, said that the tax increases announced by the Chancellor in the October budget, as well as “global uncertainty” over potential US trade tariffs by Donald Trump, have “dragged the economy into stagnation.”

The weaker-than-expected growth data has further fueled expectations that the Bank of England will cut interest rates from 4.75% to 4.5% at its next meeting in February. But Wood said the outlook for 2025 was brighter than the 2024 data suggests. He said that while the business tax increases will take effect in April, the economy should get a boost from Reeves "putting the increased tax back into more spending" in 2025.