Prime Highlights:
UK economy grows by just 0.1% in November, below expectations.
Data supports expectations that Bank of England will reduce interest rates in February.
Inflation rate for December comes in at 2.5%, providing some relief.
Key Background:
The UK economy showed sluggish growth in November, further fueling expectations that the Bank of England (BoE) will lower interest rates in its upcoming February meeting. According to the latest data from the Office of National Statistics (ONS), the economy expanded by just 0.1% month-on-month, falling short of economists’ expectations of 0.2%. This marks the third consecutive month of minimal growth, following declines of 0.1% in September and October, with a slight 0.2% growth recorded in August.
The meager growth observed in November was mainly driven by the services sector, providing the first sign of economic recovery in three months. However, overall, the UK economy showed little momentum. For the three months to November, real GDP showed no growth compared to the preceding three months. While the services sector stagnated, production fell by 0.7%, and construction grew by just 0.2%.
In response to the data, Chancellor Rachel Reeves expressed her determination to accelerate economic growth by fostering investment, driving reforms, and addressing inefficiencies in public spending. Nevertheless, the latest figures underscore the ongoing challenges the UK faces in stimulating meaningful economic expansion.
The news comes as the BoE weighs its monetary policy decisions ahead of its February 6 meeting. Despite the November growth figures, the BoE is likely to factor in inflation concerns, including robust wage growth and the wider economic uncertainty. However, with inflation easing to 2.5% in December—lower than the anticipated 2.6%—some economists predict that the BoE could cut interest rates from 4.75% to 4.50% next month. The December inflation data revealed a drop-in core inflation to 3.2%, down from 3.5% in November, providing some reprieve for the Labour government.
Despite the slight dip in inflation, concerns remain over the UK’s sluggish growth prospects and the broader challenges posed by international trade dynamics. Samuel Edwards of financial services firm Ebury highlighted the persistent issues UK businesses face amid widening trade deficits, with potential headwinds from the incoming U.S. administration and ongoing efforts to strengthen trade ties with the EU and China. In sum, while the UK economy showed some signs of life in November, the persistent challenges it faces are expected to influence the BoE’s next moves, with a rate cut increasingly likely in February.
