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The British Pound moved higher against the Euro, Dollar and other major currencies after UK GDP data for the final quarter of 2024 beat expectations.
The Pound-to-Euro exchange rate gapped higher to 1.1995 in the minutes after the ONS said GDP rose 0.1% in the final quarter of the year, up from 0% in the previous quarter and surpassing an expectation of -0.1%.
The Pound-to-Dollar exchange rate jumped through the 1.25 barrier after the release showed 0.4% growth for the month of December, marking a strong recovery from November's 0.1% and exceeding the expectation of 0.1%.
"There is no denying that domestic demand performed strongly going into Christmas. The question remains though as to how (real) labour market pressures and weak confidence will feed through to growth after that," says Sam Hill, Head of Market Insights at Lloyds Bank.
These data will come as a relief to Chancellor Rachel Reeves, who is desperately trying to drum up confidence in the UK economy following a near-ubiquitous run of poor economic data releases that suggests the economy has effectively flatlined under her tenure.
These data will also ease the Bank of England's concerns that the economy will need another interest rate cut next month.
UK bond yields fell as markets priced out the odds of a March cut, and the Pound is rising in response.
Above: GBP/EUR at five-minute intervals.
The ONS data shows government spending was the primary driver of the growth at 0.8%, and analysis from the National Institute of Economic and Social Research (NISER) says higher government spending will stimulate economic growth to 1.5% in 2025.
This figure would surprise most economists and would exceed the Bank of England's forecast for growth to reach just 0.75%.
A government spending-fuelled acceleration in the economy would also wrong-foot markets that expect a much poorer outturn in the year ahead, meaning February's print could be the first of a run of better-than-expected outturns that would inevitably reduce the odds of further Bank of England rate cuts.
The effect on financial markets would include rising bond yields and pound exchange rates in the coming months. "We think that this is a solid platform for the pound to stage a deeper recovery, even if GBP/USD is sticky around $1.25 in the short term," says Kathleen Brooks, research director at XTB.
But We're Still Getting Poorer
Although the headline figures will relieve the government, Prime Minister Keir Starmer and the Chancellor won't receive a political dividend as your everyday Brit won't feel any benefit.
In fact, the average Brit was worse off over this period as real GDP per head is estimated to have fallen by 0.1% in Quarter 4 2024.
This describes an economy where immigration-fuelled population growth is outstripping economic output.
"Almost all the economic evidence suggests that after a large inward migration surge like the one the UK has experienced since Brexit, GDP per capita will be depressed given a large denominator effect," says Simon French, Chief Economist at Panmure Liberum.
The NIESR says even if the economy strikes their out-of-consensus output of 1.5% in 2025, "growth won't immediately translate into higher living standards for every household."
In fact, "the living standards of the bottom 40% of households will not return to pre-2022 levels before the end of 2027."
Above: GDP per person.
Economists Forecast Disappointment
Breaking down the growth figures reveals the challenges for the UK in the coming months.
Construction grew by 0.5% in Q4, the services sector increased by 0.2% and production fell by 0.8%. International trade also subtracted from Growth.
"Higher taxes for businesses, a lingering drag from the previous interest rate hikes and softer overseas demand explain why we have revised down our UK GDP growth forecasts, from 1.3% to 0.5% for 2025 and from 1.6% to 1.5% for 2026," says Paul Dales, Chief UK Economist at Capital Economics.
Above: UK employment is falling. Image courtesy of Lloyds Bank.
This means Capital Economics have shifted forecasts from being a bit stronger than those of the consensus and the Bank of England to a bit weaker.
Neil Birrell, Chief Investment Officer at Premier Miton Investors, says it would be incorrect to be talking about an economy that is in good health.
"After all, it only grew at 0.1%. Worryingly, business investment fell sharply, displaying the level of confidence in the corporate sector at present. The data is better than expected, but nothing to get excited about," he says.
If the more pessimistic forecasts do come to pass, then the Pound will struggle in the coming year.