UBS Adjusts Economic Outlook for the UK
Recent developments in the UK economy show a surprising return to growth in November, yet the increase was not as robust as anticipated. In response, UBS has made cuts to its GDP forecasts for the upcoming years, 2024 and 2025.
Analysis of GDP Growth
According to official data, the UK’s gross domestic product rose by just 0.1% from October, falling short of economist projections that primarily predicted a 0.2% increase. This modest growth comes in the wake of declines seen in the months of September and October, signaling potential headwinds as the economy moves forward.
Impact of Tax Increases
The reported data captures the economic climate following significant tax hikes on businesses implemented by Chancellor Rachel Reeves in her inaugural budget. Analysts are now closely monitoring the ramifications of these changes on both consumer and business sentiment.
Business Sentiment and Outlook
Ben Jones, the lead economist at the Confederation of British Industry, remarked on a prevailing attitude of caution among UK businesses. This sentiment shift means that many companies are heading into 2025 with intentions to minimize operational costs. As a result, this reduction may likely impact hiring, wages, and investment strategies in the near future.
Sector-Level Performance
Despite a slight uptick in monthly GDP for November, UBS's calculations indicate that the average GDP for both October and November, along with assumptions for December's output, may suggest a modest contraction of 0.1% quarter-over-quarter (q/q) in the fourth quarter of 2024.
Sector Contributions to Growth
Examining sector contributions reveals that the industrial sector continues to hinder overall growth, overshadowing a small positive uptick from construction and stagnant performance from services. Consequently, UBS has revised its UK GDP growth forecasts down by 0.1 percentage points, now projecting a growth rate of 0.8% for 2024. Similarly, the 2025 forecast sees a decrease of 0.4 percentage points, bringing it down to 1.1%.
Factors Behind the Downgrade
UBS analysts attribute this downgrade to two primary factors. First, a downward revision of the third-quarter GDP, which shifted from a growth of 0.1% to flat growth at 0%. Secondly, the slower-than-expected growth indicated by the Q4 data strengthens existing concerns reflected in sentiment indicators. The analysts noted, "Our estimate for Q4 GDP has now been revised to 0% q/q, down from the initial projection of +0.4% q/q, which affects the carry-over for 2025.”
Future Trajectory
Looking beyond the fourth quarter of 2024, the predicted growth trajectory remains stable. A modest recovery is expected at the start of 2025, with a projected GDP growth of 0.4% q/q in the first quarter, buoyed by front-loaded fiscal expenditure outlined in the recent Autumn Budget.
Frequently Asked Questions
What prompted UBS to cut its GDP forecasts for the UK?
UBS revised its GDP forecasts due to lower-than-expected growth data and a downward revision of prior quarter figures.
How much did UK GDP grow in November?
In November, the UK GDP growth was reported at 0.1%, which was less than anticipated.
What factors are affecting business sentiment in the UK?
Recent tax increases on businesses and a focus on cost reduction have contributed to a cautious mood among UK companies.
What are the new GDP growth projections for 2024 and 2025?
UBS now forecasts a 0.8% growth rate for 2024 and 1.1% for 2025.
Is there an expected rebound in the UK economy?
A temporary recovery is expected at the beginning of 2025, driven by increased fiscal spending.
