UK economy news: the United Kingdom is at risk of entering a technical recession, raising concerns among economists and policymakers.
Predictions of GDP Decline
Economists estimate that under the impact of Reeves’ tax-increasing budget, the UK’s GDP could decline by 0.1% in the fourth quarter following stagnation in the third quarter. With a sluggish start to 2025 indicated by surveys, the Bank of England has assessed a 40% chance that the UK will slip into a technical recession, defined as two consecutive quarters of economic contraction.
Challenges for the Chancellor
The growing pressures from stagnant growth and rising living costs complicate Reeves' position ahead of new official forecasts next month. The Office for Budget Responsibility (OBR) is expected to follow the Bank of England in revising down its economic projections.
Rising Borrowing Costs
The UK is facing an exceptionally challenging dilemma. The government’s borrowing costs are comparable to those of the rapidly expanding U.S. economy, yet the UK’s growth rate is more aligned with the struggling Eurozone. The European Central Bank has significantly lowered interest rates compared to the UK's, making it particularly difficult for Reeves to stabilize public finances. Investor confidence has waned, as the UK's debt-to-GDP ratio has reached its highest level since the early 1960s.
Concerns Over Debt Sustainability
According to EY, the UK’s borrowing costs relative to its nominal growth rate are higher than most developed economies. Ruth Gregory, Deputy Chief Economist at Capital Economics, states that unless the government can reduce its substantial primary deficit, concerns over the sustainability of public sector debt may intensify.
GDP Release
The UK’s Office for National Statistics is set to release GDP data for the fourth quarter, along with revised estimates for December. Analysts predict stagnant output for December, indicating no change compared to the Labour Party's takeover seven months ago. Consumers and businesses continue to feel the impact of the £40 billion ($49.5 billion) tax hike announced in the budget and the global economic threats stemming from tariffs imposed by former President Trump.
Economic Recovery Prospects
Some economists anticipate a modest recovery in the first quarter, driven by government spending, but they caution against dismissing the possibility of the UK entering a recession. They noted, "We are surprised by the recent weakness, and economic activity may remain disappointing. This could push the UK economy into a technical recession last winter and provide the Bank of England with reasons to reconsider its gradual rate-cutting approach."
Economic Predictions
Last week, the Bank of England set a pessimistic tone, executing its third rate cut since August. It forecasts a 0.1% contraction in the UK’s economy for the fourth quarter and has halved its growth forecast for 2025 to 0.7%. The Bank also expects inflation to exceed previous forecasts due to rising energy prices. Governor Andrew Bailey hinted at a "gradual and cautious" approach to further rate cuts, which the money market interpreted as a potential for two to three additional cuts this year.
Political Commitments
For the Labour Party to fulfill its campaign promises regarding public service reform and investment promotion, economic growth is essential. Last month, Reeves committed to building new wind turbines, roads, airports, railways, and trade agreements to revitalize the sluggish economy, but economists warn that these projects will take time to materialize.
Budget Responsibility Challenges
As the OBR assesses the economic situation ahead of the March 26 spring statement, Reeves faces a "reckoning." On Tuesday, the OBR adjusted its growth forecasts downward, revealing that Reeves might face a slight deficit. The downgrade in ratings and the bond market trends since October have increased borrowing costs, erasing her previously reported £9.9 billion surplus.
Reeves now confronts a scenario where spending cuts may be necessary. Following strong opposition to her budget proposals, she indicated a temporary halt on tax increases. The UK’s 10-year bond yields are about 4.5%, similar to those in the U.S., yet the growth rate gap is significant. While the U.S. economy grew nearly 3% last year, the Bank of England estimates the UK’s growth at just 0.7%, forecasting a recovery only by 2026.
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