According to a preliminary report released by the U.K.’s Office for National Statistics (ONS) on Thursday, the economy experienced a growth of 0.1% in the fourth quarter, surpassing forecasts.

Economists surveyed by Reuters had predicted a contraction of 0.1% in the nation’s GDP during this timeframe.

Positive contributions from the services sector, which grew by 0.2%, and the construction industry, up by 0.5%, helped enhance the economic outcome. However, the production sector faced a decline of 0.8%, as highlighted by the ONS.

After a stagnant third quarter with zero growth, the British economy showed mixed monthly GDP indicators, including a 0.1% decline in October followed by a 0.1% increase in November. The ONS reported that December saw a growth uptick of approximately 0.4% month-on-month, driven by gains in both services and production.

In response to the data, the British pound rose by 0.4% against the U.S. dollar, remaining steady against the euro.

Slow economic growth and a recent decrease in inflation prompted the Bank of England to lower its interest rate for the first time this year, reducing the benchmark rate to 4.5%.

The central bank indicated that additional rate cuts may follow as inflationary pressures ease. Nonetheless, it cautioned that rising global energy prices and adjustments in regulated prices could lead headline inflation to rise to 3.7% in the third quarter of 2025, even as domestic inflationary pressures diminish. The Bank of England forecasts inflation will return to its 2% target by 2027.

The central bank’s growth forecast for the U.K. has also been revised down from 1.5% to 0.75% for this year.

This underperformance places added pressure on U.K. Chancellor Rachel Reeves, whose fiscal strategies unveiled last fall have come under scrutiny for increasing the tax burden on British companies. Detractors assert that these strategies, which include hikes in National Insurance (NI) contributions and the national minimum wage, could adversely affect investment, employment, and economic growth.

Chancellor Reeves defended her “Autumn Budget,” asserting that the £40 billion tax increase was essential to support public expenditure while prioritizing economic expansion.

On Thursday, in light of the recent growth data, Reeves stated that the government is “removing obstacles that hinder businesses looking to expand.”

Economists had largely anticipated the British economy would finish the year on a subdued note, prompting downward revisions of their growth forecasts for 2025.

Paul Dales, chief U.K. economist at Capital Economics, noted, “The increased tax burden on businesses, residual impacts from previous interest rate increases, and softer international demand have led us to revise our forecasts for U.K. GDP growth, downgrading them from 1.3% to 0.5% for 2025 and from 1.6% to 1.5% for 2026.”

Sanjay Raja, a senior economist at Deutsche Bank, agreed, stating that short-term downgrades for the U.K.’s growth outlook for 2025 were “inevitable.”

“Unless there are significant adjustments, the negative impact from Q4 2024 will inherently affect our 2025 growth forecast of 1.25%. We could see a downgrade by around 0.25 percentage points, at the very least,” he mentioned in a recent research note.

“Unfortunately, more unfavorable news is on the horizon. Early survey data for the year has yet to demonstrate any signs of recovery. Risks to our Q1 2025 GDP growth estimate of 0.3% quarter-on-quarter are increasing. The current PMI data indicate only a slight upturn to begin the year, along with escalating trade war threats,” Raja added.

“Trade uncertainties are likely to linger for some time,” he concluded.

Former U.S. President Donald Trump had threatened to impose tariffs on goods imported from the European Union and the U.K., yet he has hinted that Britain, which has a more balanced trade relationship with the U.S., might reach an agreement to avoid such tariffs.

The U.K. remains optimistic about sidestepping tariff implications, with Reeves expressing last month that the U.K. is “not part of the problem” regarding the trade deficits that the president is concerned about.

Last week, the Bank of England noted that any potential tariffs imposed by the U.S. could have varying inflationary effects for the U.K., influenced by other nations’ trade strategies and the strength of different economic interactions.

The central bank indicated that while many channels would likely reduce U.K. economic activity, some factors might either decrease or increase U.K. inflation rates.

For instance, diminished U.S. demand for U.K. exports would exert a disinflationary effect, but disruptions in the supply chain due to missing components could lead to temporary price increases, as highlighted by the BOE.