Britain's Chancellor of the Exchequer Rachel Reeves attends a meeting with business leaders in cent (Image: AP)
Rachel Reeves is "flirting with recession" after figures revealed the UK economy narrowly avoided a contraction at the end of last year, an expert has warned.
Julian Jessop, Economics Fellow at the Institute of Economic Affairs, believes Wednesday's GDP data, which showed a meagre 0.1% growth in the final quarter of 2024, were hardly cause for celebration for the beleaguered Chancellor.
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In a blog published on his own website, Mr Jessop said: "The first official figures for UK GDP in the final quarter of last year may not have been quite as bad as expected, but it says a lot that some are keen to trumpet economic growth of just 0.1% as 'good news' and a much-needed 'boost' for Rachel Reeves.
"Quarterly growth of at least 0.4% should be the bare minimum, and hopefully higher."
Ms Reeves has been under mounting pressure since taking office in July 2024 after Labour’s election victory. Yesterday, a leaked Office for Budget Responsibility (OBR) report warned her she has lost her ￡9billion of supposed "fiscal headroom", the buffer she had hoped would provide room for manoeuvre in the upcoming Budget.
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Rachel Reeves pictured before her October Budget (Image: Getty)
While the headline GDP number just about avoided confirming a technical recession – defined as two consecutive quarters of negative growth - Mr Jessop pointed out that when adjusted for population growth, the UK is effectively already there.
Mr Jessop said: "Output per head fell again for the second successive quarter, meaning that headline growth is still flattered by the increase in the size of the population (and specifically by high levels of net migration to the UK). Put another way, the UK economy is back in recession in terms of output per head."
More concerning still, Mr Jessop highlighted that the only drivers of growth were government spending - funded by higher borrowing - and firms stockpiling unsold goods, which could mean weaker demand in early 2025.
He said: "The latter is alarming because it means that any pickup in demand in early 2025 could be met from existing stocks rather than requiring new production."
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Meanwhile, private sector activity shrank, with a sharp 3.2% quarterly drop in business investment. This aligns with bleak business surveys that suggest confidence remains low.
Mr Jessop said: "The one positive thing I can say is that UK economy did at least manage to grow more quickly than other ‘major’ (ie G7) European economies in Q4 2024, but this is not a high bar."
He warned that even if the UK avoids outright recession, growth will likely fall well short of the Office for Budget Responsibility’s (OBR) forecasts, which underpin the government’s fiscal plans.
Mr Jessop said: "For now, I’m leaving my 2025 UK growth forecast at 1.0%, but even this would be half the rate anticipated by the OBR. Moreover, the risks are skewed to the downside, with a high chance that growth is weaker this year than last."
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FWIW, I'm leaving my 2025 UK growth forecast at 1.0%, but even this would be half the rate baked into Rachel Reeves' first Budget.
Moreover, the risks are skewed to the downside, with a high chance that growth is weaker this year than last.
(Or you could believe the IMF... ??????) pic.twitter.com/eFa8rJL9BL
— Julian Jessop (@julianHjessop) February 13, 2025
That weak growth outlook could mean Ms Reeves is forced into further tax rises, Mr Jessop cautioned.
He said: "Further tax rises are therefore very likely, though not yet inevitable if spending can be controlled instead - obviously, a big 'if'."
The expert also warned of the risk of a dangerous cycle, or "doom loop," in which low growth leads to higher taxes, lower confidence, and even weaker growth.
Mr Jessop said: "The outlook for the public finances is therefore still poor, and the risk of a 'doom loop' of weaker growth, more tax increases, falling confidence and further weakness remains high. Indeed, this process may already have started."
The impact of government policy is also weighing on the economy, he argued, with tax rises and additional business costs hurting private sector growth.
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Prime Minister Sir Keir Starmer and Rachel Reeves in Downing Street (Image: Getty)
Mr Jessop said: "The foundations of growth in the private sector have been undermined by the increases in tax and other business costs announced in the Budget, as well as by more state intervention in the labour and energy markets."
Consumer spending is being hit by job fears, while businesses are being squeezed by rising government borrowing. Some relief may come later in 2025 as public spending measures kick in, and lower-paid workers see a boost from the minimum wage rise. However, Mr Jessop warned that businesses appear to have already priced in the downsides.
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Mr Jessop said: "The key message today is that the economy may be flirting with a recession all year - and the private sector is already in one. The Budget has hit the foundations of growth in the private sector and hit them hard."
Responding to the latest GDP figures, Ms Reeves acknowledged the challenges ahead. She said: “We are doing what is necessary to bring stability back to the economy, reforming the economy, the planning system, regulation and pensions to encourage investment in our economy, which is the lifeblood of a successful economy.
"We need to go further and faster in doing that, to turn around our poor growth performance and to make working people better off.”