Investing.com - The UK economy returned to growth in November, but the smaller-than-expected expansion has prompted UBS to cut its GDP forecasts for 2024 and 2025.
UK gross domestic product rose by 0.1% from October, according to official data, after falls in September and October. However, many economists had mostly forecast a 0.2% rise.
This data incorporated the first month after Chancellor Rachel Reeves announced big tax increases for businesses in her first budget.
Ben Jones, lead economist at the Confederation of British Industry, said a mood of caution had settled over UK businesses since then.
"Many firms are entering 2025 with a focus on reducing operational expenditure, which is likely to weigh on pay, hiring and investment in the months ahead," Jones said.
Despite a pick-up in monthly GDP growth in November, UBS calculates that the average of October and November GDP (assuming unchanged output in December) would be consistent with a slight GDP contraction of 0.1% q/q in Q4-24.
At the sector level, similar to the previous quarter, the industrial sector appears to be the key drag on growth, more than offsetting a small positive contribution from the construction sector and a flat contribution from services.
As a consequence, UBS cut its UK GDP growth forecasts by 0.1 percentage points to 0.8% for 2024 and by 0.4pp to 1.1% for 2025.
“The downgrade is driven by two factors: first, the downward revision to Q3 GDP (from +0.1% q/q to 0% q/q); second, slower-than-expected growth in Q4 with today's GDP data reinforcing weak indications from sentiment indicators,” analysts at the Swiss bank said, in a note dated Jan. 16.
“As a result, we cut our Q4 GDP estimate to 0% q/q (prev. +0.4% q/q) that also implies lower statistical carry-over for 2025. The quarterly growth trajectory beyond Q4-24 is unchanged, implying a temporary bounce back at the start of 2025 (Q1 GDP +0.4% q/q), supported by the front-loaded fiscal spending announced at the Autumn Budget.”