Britain’s economy hit a number of major milestones in 2024 as lower inflation paved the way for the first interest rate cuts for over four years, but the path was far from smooth.
Against the backdrop of seismic changes in the UK political landscape, the economy initially seemed to steady, thanks to inflation finally falling back to target – and even below target at one stage.
Having started the year at 4%, falling food price inflation helped the Consumer Prices Index (CPI) retreat to 2% in May for the first time in almost three years.
Former Prime Minister Rishi Sunak insisted it showed the economy had “turned the corner” and claimed this was down to the previous Conservative government’s “bold action” amid the cost of living crisis.
It came as official figures also showed the UK had rebounded out of the shallow recession seen at the end of 2023 with better than expected growth of 0.7% in the first three months of 2024.
But the good economic news was not enough to prevent a landslide victory for Labour in the July general election.
It was not until after the polls that the Bank of England was able to deliver the long-awaited cut in interest rates, with a reduction from 5.25% to 5% in August – the first decrease since the onset of the pandemic in March 2020.
The UK’s base rate had been held at a 16-year high of 5.25% since August 2023 before long-suffering borrowers were given some respite.
But where economists had once pencilled in successive rate cuts throughout the year, the forecasts were soon pared back as the inflation outlook looked less rosy.
Rate-setters at the Bank became increasingly concerned by persistent inflation in the all-important services sector and as workers demanded ever higher wages following years of soaring cost pressures.
While pay consistently outstripped inflation throughout 2024 in a welcome boost to households, resilient growth in wages was also a headache for policymakers.
Regular earnings growth hit a peak of 7.9% in August 2023, and though it has been falling steadily since then, it has not come down as fast as forecast by the Bank, signalling troublesome underlying inflation pressures.
Inflation also failed to remain on-target and, despite a brief spell at 1.7% in September, the pace of price rises quickly sped back up again, with CPI reaching 2.6% in November.
The Bank looked past this to cut rates for the second time in November, to 4.75%, but it came with a note of caution that it would only take a “gradual approach” to cutting rates further.
While weighing up the underlying inflation worries looming in the background, the Bank has also been faced with a shaky picture for both the jobs market and economic growth as its previous flurry of rate hikes hit hard.
All the signs pointed to a cooling jobs sector, with the unemployment rate ticking up to 4.3% by the autumn, a steep drop in vacancies and the number of workers on payrolls remaining largely unchanged over the year.
This was set against faltering growth, with output swiftly pulling back from the encouraging first quarter performance.
A raft of year-end downward revisions meant growth was even more paltry than first feared, with the economy flatlining since the summer.
With zero growth recorded in the third quarter and the Bank forecasting no expansion in the final three months, the economy is once again a whisker away from a technical recession, as defined by two quarters in a row of negative output.
It has ensured a tough economic start to Labour’s term in office, with Prime Minister Sir Keir Starmer having made restoring growth the basis of his first “mission” in Government, saying he wants to make the UK the fastest growing economy in the G7.
The disappointing GDP performance also comes amid fears of a resurgence in inflation and a hit to jobs after Labour’s October 30 Budget announced steep increases in employers’ national insurance contributions and a minimum wage rise next year.
Many firms have already warned they will have to increase prices in response, which some fear will contribute to inflation rising above 3% by spring 2025, while it is expected to lead to an inevitable pull back in hiring.
This could curtail further rate rises and lead to a period of much-feared “stagflation”, where the economy faces the twin threat of stagnating growth and rising inflation.
Laith Khalaf, head of investment analysis at AJ Bell, warned that “with the economy stalling, the watchword for 2025 is now stagflation”.
“Wherever you look, the green shoots of an inflation revival seem to be pushing up the turf.
“As inflationary forces gather, the Bank of England isn’t going to be gung-ho about cutting interest rates.”
But it may not be all doom and gloom for borrowers in 2025, with a worsening GDP outlook offering potential for borrowing costs to come down faster, according to economists.
Philip Shaw at Investec Economics said: “The better news is that it will make the Monetary Policy Committee more inclined to bring interest rates down early next year.”
Most experts are predicting three to four rate cuts in 2025, but with the full effect of the Budget measures still unclear and uncertainty over incoming US president Donald Trump’s trade tariff plans, the outlook for the economy is decidedly cloudy.
