Economy in brief: January 2025

Alpesh Paleja Interim Deputy Chief Economist, CBI

Your monthly guide to the UK economy, giving you a monthly overview of the major trends impacting the UK's main business sectors.

20 Jan 2025, 4 min read

Government bond yields have risen globally…

2025 has gotten off to an eventful start. The turn of the year saw notable rises in sovereign debt yields across many advanced economies, sparking concern over government borrowing costs in
highly indebted countries. Our recent note unpacks the rise in yields : despite the global synchronicity, concerns around a deteriorating growth outlook exacerbated the volatility in the UK.

UK yields have edged lower since mid-January, but markets remain sensitive to any signs of a weaker economic outlook. A further spike in yields could also have implications for the public finances: most analysts believe that the rise in borrowing costs so far has eroded the Chancellor’s headroom against her fiscal rules.

…amid activity weakening at home…

Concerns over the outlook followed signs of softer activity over H2 2024. Revisions to official data showed that the economy has flat-lined since the summer of 2024 – the latest data for November showed that the economy only managed to eke out growth of 0.1%
on the month. Business surveys have softened, with the CBI’s own growth indicator pointing to a significant fall in output over the quarter ahead. Hiring intentions also deteriorated – now at their weakest since the COVID pandemic – and price expectations have
ticked higher.

Some softening in activity was always expected in the second half of 2024, but appears to have occurred quicker than expected. At least some of this is in reaction to measures announced in October’s Budget. In our latest forecast, we do expect some growth momentum over the year ahead. But the sluggishness in recent data suggests that the risks to the outlook have probably moved further to the downside.

…complicating the trade-off for monetary policy

There was some respite from inflation nudging down in December, to 2.5%, in line with the Bank of England’s forecast. However, much of the decline was driven by lower air fares and hotel prices, two components which can be notoriously volatile. Indeed, most of the Monetary Policy Committee (MPC) are still placing emphasis on the stickiness in domestic price pressures, reinforcing our view of only a gradual pace of interest rate cuts over the year ahead.

Nonetheless, the weakening in near-term activity is widening the trade-off facing the MPC in setting interest rates. Indeed, after voting in the minority to cut rates in December, the newest MPC member, Alan Taylor, indicated that he was inclined to vote for a faster pace of monetary loosening going forward, for this very reason.