UK Economy Grows Modestly by 0.1% in November, Falling Short of Expectations

The UK economy grew by a modest 0.1% in November, missing forecasts of 0.2%, according to data released by the Office for National Statistics (ONS) on Friday. While the figure marks a slight recovery from two consecutive months of 0.1% contraction, it underscores the ongoing challenges facing Britain’s economic recovery as Labour’s new government contends with high inflation, weak consumer confidence, and global trade uncertainties.

The disappointing GDP result caused a small dip in the value of the pound, which fell 0.10% against the dollar to $1.22 and 0.25% against the euro to €1.18. Despite the lackluster economic growth, the UK’s equity markets remained buoyant, with the FTSE 100 climbing by 1.1%, or 90.77 points, to 8,391.90, and the FTSE 250 up 1%, gaining 194.08 points to 20,527.70. Government bond yields remained flat, reflecting a mix of investor caution and optimism following a surprising drop in inflation earlier this week.

Chancellor Rachel Reeves acknowledged the modest progress but emphasized that more significant improvements would take time. The latest three-month data from the ONS revealed zero growth over the period leading up to November, further highlighting the difficult path ahead for the government.

Business sentiment remains cautious following Labour’s October budget, which introduced a £25 billion increase in national insurance contributions and £70 billion in additional government spending. Many businesses have warned that these measures could lead to job cuts and higher prices as they adjust to the new tax burdens.

Reeves defended her approach, insisting that her government has ended the “instability” caused by the previous Conservative administration. “This new government has come in with a determination, a No 1 mission, to grow the economy. That takes time,” she said, adding that she will meet with regulators to push for a stronger pro-growth focus ahead of the spring statement and the Office for Budget Responsibility’s updated forecasts in March.

Concerns about a potential trade war, fueled by the incoming US President Donald Trump’s pledge to impose tariffs on imports, also loom large. Business Secretary Jonathan Reynolds expressed unease about the possibility of a “tariff war between friends.”

Reeves also faces growing pressure to manage public finances carefully, with market borrowing costs rising. Speculation is mounting that the Chancellor may need to raise taxes or curb spending. However, Reeves remains committed to “rooting out waste in public spending” while prioritizing growth.

Optimism has emerged following an unexpected drop in inflation to 2.5% in December, with some analysts predicting that the Bank of England may soon begin lowering interest rates, currently at 4.75%. This could offer relief to borrowers, particularly those struggling with high mortgage costs.

Despite the slight growth in services, November’s figures highlighted weaknesses in other sectors. Construction saw a 0.4% rise, driven by commercial developments, but manufacturing and oil and gas extraction continued to struggle. Analysts caution that these figures do little to dispel concerns about a stagnant economy heading into 2025.

The OBR projects 2% GDP growth for 2025, although some experts consider this overly optimistic, given the potential risks of a trade war or additional global economic downturns. Reeves’ challenge is clear: delivering a robust economic recovery remains a formidable task. As HSBC analysts put it, “For a government that has said growth is its top priority, this is not great news.”