UK Economy May Be on Brink of Recession

The UK economy contracted 0.1% in the fourth quarter of 2024, marking a potential recession and increasing pressure on Chancellor Rachel Reeves.

Despite Reeves' tax hikes, surveys indicate a slow start to 2025. The Bank of England (BOE) estimates a 40% chance of a technical recession (two consecutive quarters of contraction).

Flat-lining growth and cost-of-living pressures compound problems for Reeves before official forecasts next month. The Office for Budget Responsibility (OBR) is expected to lower economic projections.

Reeves has ruled out further tax hikes, leaving her with the option of cutting public services or welfare spending.

UK Faces Challenges with Fiscal Stability

UK borrowing costs are comparable to the rapidly growing US economy, but growth is closer to the struggling eurozone. This poses stabilization challenges as government debt is high.

According to EY Item Club, the UK spends more on borrowing relative to growth rates than most advanced economies.

Deputy Chief UK Economist at Capital Economics, Ruth Gregory, emphasizes the need for deficit reduction to address concerns about debt sustainability.

GDP Stagnation and Recession Risk

The Office for National Statistics will release fourth-quarter GDP figures on Thursday. Bloomberg Economics predicts no growth during the month, leaving the economy unchanged since Labour took office.

Economists Dan Hanson and Ana Andrade expect a modest recovery in Q1 due to government spending but acknowledge recession remains possible.

The BOE cut interest rates for the third time since August, signaling a "gradual" approach to further cuts.

Growth Essential for Labour's Promises

Labour's election promises require economic growth. Reeves has pledged infrastructure investments and trade deals, but experts caution about the time required for them to impact the economy.

The OBR's assessment in the March 26 Spring Statement will be crucial for Reeves, as it could indicate a need for spending cuts.

UK Borrowing Costs outpace Growth

Ten-year bond yields in the UK are around 4.5%, similar to the US. However, the US economy grew 3% in 2024, while the UK's growth estimate for 2025 is 0.7%, similar to the eurozone.

Peder Beck-Friis of PIMCO notes that the UK's high borrowing costs relative to growth are comparable only to Italy.