The UK likely slipped into contraction in the final quarter of last year, in a further indication of the challenges facing Chancellor Rachel Reeves as she seeks to fire up the economy.
New figures set to be released on Thursday are expected to show that the UK economy shrunk 0.1 per cent in the three months to December.
This would cap off a disappointing end to the year, after the economy stagnated between July and September, and raises the unwelcome prospect of a recession.
“The risk of a recession, albeit a mild one, is real,” analysts at Capital Economics said, pointing out that there were “few signs of a turnaround” so far in the New Year.
Rob Wood, chief UK economist at Pantheon Macroeconomics, also expected to see the economy shrink, but he pointed out that small changes to previous releases could stave off contraction.
“A small upward revision to November’s GDP would be enough to avoid GDP falling in Q4 as a whole,” he said.
Either way, the figures will add to the gloom facing the UK economy at the start of 2025, with many analysts warning that it faces ‘stagflation‘ – the combination of weak growth and sticky inflation.
Fears about stagflation were highlighted last week after the Bank of England published its latest set of economic forecasts.
The Bank slashed its 2025 growth estimate to 0.7 per cent rise, compared to the 1.5 per cent it anticipated in November. Bank officials also predicted that the headline rate of inflation would rise to 3.7 per cent later in the year, which could potentially slow the pace of interest rate cuts.
The figures will make difficult reading for Chancellor Reeves as she seeks to turn the page on a torrid first six months in power.
Having expanded at a relatively fast pace early last year, the economy has been more or less stagnant since Labour’s election victory last summer.
Measures of corporate and consumer confidence plummeted in the wake of October’s Budget, in which Reeves announced £40bn worth of tax hikes.
Surveys indicate that firms are cutting jobs at the fastest rate since the pandemic in anticipation of the extra payroll costs, which will filter through in April.
Over the past few weeks Reeves has announced a range of measures – such as a third runway at Heathrow and changes to the planning regime – to try and reinvigorate the economy.
Most economists expect growth will pick up throughout the remainder of the year, driven by the healthy state of household balance sheets.
“We remain optimistic that growth will rebound,” Wood at Pantheon said. “Real wages are rising strongly, and consumers are scaling back their saving, supporting consumption.”