UK inflation slows marginally in December

Consumer Price Index (CPI) inflation slowed in December, according to new data from the Office for National Statistics (ONS). CPI inflation rose by 2.5% in the 12 months to December 2024, down from 2.6% in the 12 months to November (Figure 1).

Figure 1:

This drop in inflation had not been expected by most surveyed analysts. Looking at the data in more detail, the ONS observed that the largest downward contribution to inflation “came from restaurants and hotels; the largest upward contribution … came from transport”.

Beyond the headline inflation figure other inflation measures also generally eased. Core CPI (excluding volatile energy, food, alcohol and tobacco prices) inflation moved to 3.2% over the year to December 2024, down from 3.5% in November. The CPI goods annual rate rose from 0.4% to 0.7%. The CPI services annual rate was 4.4% in December down from 5.0% in November. This was the slowest rate of services inflation since March 2022.

Looking beyond current inflation and at the cost of living in general, new research by the Resolution Foundation published in January 2025 has examined how Britain compares with its European neighbours. The study showed that high housing costs “widen living standards gaps between poor families in Britain and their German, Dutch and French counterparts”. In particular it found that “when adjusting for the cost of all goods and services, poor (10th percentile) German families are 16 per cent better off than poor British families (a gap of £1,700 a year)”.

UK GDP grows only slightly in November

The ONS also published data for UK GDP growth in November this month. This data showed that UK output grew in November, with GDP rising by 0.1% compared to a month earlier (Figure 2). This compares to monthly drops of 0.1% in the preceding two months. Despite this growth, most surveyed analysts had expected a marginally larger rate of growth.

Figure 2:

The ONS observed that this rise was “largely because of a growth in services, following an unrevised fall of 0.1% in October 2024” with services growing by 0.1% in November. However, output in the production sector fell by 0.4% in November. This follows a fall of 0.6% in October. Construction output grew by 0.4% following a fall of 0.3% the previous month. Looking at a longer period, real GDP is estimated to have been stagnant in the three months to November 2024, compared with the three months previously. Growth was seen in the construction sector over that period, but the services sector was stagnant, and the production sector declined.

UK businesses grapple with economic challenges at the end of 2024

The ONS found in their latest business insights and impacts survey that UK businesses were facing a challenging environment. It found that 30% of trading businesses in the survey reported a decrease in turnover in December 2024 compared to the previous month—the highest proportion since December 2022. Meanwhile, 20% of businesses expected turnover to decrease in February 2025, although this was down from their expectations of what would happen in January 2025. Economic uncertainty also remained a key issue, with it being cited by 28% of businesses as impacting their performance. Still on a positive note for businesses, worker shortages and recruitment difficulties among businesses with 10 or more employees fell to their lowest levels since these metrics were first recorded in October 2021.

Other recently published ONS data, on retail sales in December, also shows the challenging economic environment that the UK faces. This showed an unexpected drop in sales; falling by 0.3% in December following a rise of 0.1% in November 2024. Most surveyed analysts had expected sales to rise in December. This along with other data indicates the UK may have faced a tough end to the year. Still the unexpected drop in inflation and slower than expected economic growth have left market analysts predicting that UK interest rates may drop more quickly than was expected at the turn of the new year. This saw UK government borrowing costs ease at the end of the month following an uptick in early January.

Global economic growth holds steady but below historical trends

The International Monetary Fund (IMF) released an update to its World Economic Outlook forecast in January 2025. In it they project that global economic growth will remain steady at 3.3% in both 2025 and 2026, below the historical average of 3.7% (2000–2019). This forecast is generally unchanged from the October 2024 forecast, as stronger-than-expected growth in the United States offsets downward revisions in other major economies.

The IMF expects global inflation to continue falling, reaching 4.2% in 2025 and 3.5% in 2026, with advanced economies converging toward inflation targets more quickly than emerging and developing markets. However, inflationary pressures persist in pockets, driven by rising services prices and geopolitical risks.

For individual countries the IMF projects growth of 2.7% for the United States in 2025, driven by strong consumer demand, a robust labour market, and favourable financial conditions. However, challenges include inflation slightly above the 2% target, rising long-term fiscal deficits due to expansionary policies, and a stronger US dollar, which will put pressures on emerging markets through capital outflows and higher borrowing costs.

In the Eurozone, growth is forecast at 1.0% in 2025, reflecting manufacturing weaknesses, subdued goods exports, and Germany’s lagging performance. And in China, the economy is expected to grow by 4.6% in 2025, supported by fiscal stimulus and stronger net exports. However, the recovery is fragile due to a struggling property market, low consumer confidence, trade policy uncertainty, and structural challenges like an aging population and declining investment. Meanwhile, for the UK the IMF forecasts growth of 1.6% in 2025 and 1.5% in 2026.

The global economy enters 2025 facing challenges

Despite these generally steady forecasts, the global economy continues to face challenges. One of these is President Trump’s proposed tariffs. In comments following his inauguration, the new President threatened to increase tariffs on imports from Mexico and Canada by up to 25%. The Canadian Chamber of Commerce has estimated if these tariffs came into effect, it could shrink the Canadian economy by 2.6%. More broadly, commentators have expressed the view that these tariffs may be inflationary and could lead to US interest rates being higher than they otherwise would be.

Elsewhere, other countries entered the year with poor growth, as seen, for example, by Germany, whose economy declined for a second year in a row in 2024. Data from the Federal Statistics Office showed that Germany’s economy shrank by 0.2% in 2024 after declining by 0.3% in 2023.

Chancellor backs third runway at Heathrow

The Chancellor of the Exchequer, Rachel Reeves, delivered a speech on 29 January on the government’s plans to boost economic growth. In this speech she said “I can confirm today that this government supports a third runway at Heathrow and is inviting proposals to be brought forward by the summer. We will then take forward a full assessment through the Airport National Policy Statement”. She claimed that this could create 100,000 jobs. Beyond this she also backed several other projects including a number of initiatives in the “Oxford-Cambridge growth corridor” which she said would create a “Silicon Valley of Europe”. The Chancellor also mentioned the new Lower Thames Crossing in her speech; the government is exploring ways to finance this privately.

New research highlights the importance of London’s exports to the UK

Research by the Centre for Cities published this month highlighted the importance of London and the South East to UK exports. It found that “of the nine cities that have a larger than expected export base, five are in the Greater South East. London leads this list by some distance. It is home to 16 per cent of Britain’s population but 35 per cent of output from exporter industries”. They also observed that “those cities with larger relative export bases tend to have higher workplace wages. Not only are there more export jobs in these places, but they are also better paid”. The report also found that London had the second most number of new economy firms[1] per 10,000 working age population of anywhere in the UK at 45.8, just behind Brighton at 48.4.

GLA Economics will continue to monitor all these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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[1] The report notes that “new economy firms are identified by a company called The Data City, which uses ‘web scraping’ of websites to find companies engaged in cutting-edge activities and classify them according to a system of ‘Real Time Industrial Classifications’ (RTICs). Specifically designed to group firms in emerging sectors, RTICs provide a more precise overview than that which can be gleaned from the official Standard Industrial Classification (SIC). Examples of RTICs include FinTech, advanced manufacturing, software as a service, and neurotechnology. Centre for Cities uses all but one of the upper-level RTICs identified by The Data City in calculations, yielding around 100,000 new economy firms in total”.