UK Economy Remains Static Despite Growth Figures, Warns Bank of England Governor
Andrew Bailey, Governor of the Bank of England (BOE), has cautioned that the UK economy remains "static" despite surprisingly positive growth figures recorded at the end of 2024.
In a recent interview, Bailey highlighted the underlying tepid growth trend and a softening labor market, tempering expectations raised by the unexpected 0.1% increase in gross domestic product (GDP) during the final quarter.
The BOE's Monetary Policy Committee (MPC) had previously predicted a contraction in the fourth quarter, raising concerns about a potential technical recession under Prime Minister Keir Starmer's leadership.
"The GDP numbers were slightly stronger than we anticipated, but it doesn't alter our overall assessment that the economy has been largely stagnant since the late spring of last year," Bailey stated.
Despite the stagnant economy, the BOE's MPC has signaled a "gradual and cautious" approach to interest rate cuts due to persistent inflationary pressures and global political uncertainties. Two MPC members, including former hawk Catherine Mann, have advocated for a more significant half-point cut at the February meeting, sparking tensions within the committee.
Bailey has cautioned investors against overreacting to the MPC's vote, emphasizing that it is not intended as a communication tool. While acknowledging similarities in Mann's analysis, Bailey suggested a different interpretation based on the economy's prolonged weakness.
"Our underlying economic assessment is crucial for determining the persistence of inflation," Bailey explained. "We've experienced a period of low growth, and we believe the labor market is softening."
The BOE seeks to discern whether the economy's sluggish performance stems from supply or demand constraints, as this distinction impacts interest rate decisions. Insufficient supply can lead to inflationary pressures, even with modest demand.
Bailey also attributed the economy's challenges to weak investment hindering productivity. He reiterated the view that there is "no trade-off between financial stability and growth," a message aligned with the Labour government's stance on reducing regulatory burdens.