UK economy will grow by less than expected next year, OECD says
The OECD has downgraded its UK growth projection for next year, signalling a slower recovery than earlier hoped. For investors, this implies prolonged pressure on the pound and a delayed pivot from the Bank of England on rate cuts.
The Organisation for Economic Co-operation and Development (OECD) now expects the UK economy to expand at a weaker pace in 2025 than previously forecast, according to its latest interim outlook. While the exact revised figure was not provided in the headline, the downgrade reflects persistent headwinds from elevated inflation, tight labour markets and sluggish productivity growth.
The revision comes as the UK continues to grapple with the after-effects of high energy costs and post-Brexit trade frictions. Compared with the US, where the S&P 500 has rallied on AI-driven optimism and resilient consumer spending, the FTSE 100 remains heavily weighted toward defensive sectors and commodity stocks, offering less exposure to growth momentum. The OECD's cut reinforces the view that the UK's recovery will lag behind its G7 peers.
For fixed-income investors, a weaker growth outlook may accelerate expectations for Bank of England rate cuts, but the timing is uncertain. Governor Andrew Bailey has signalled caution, wary of sticky services inflation. Lower growth could also weigh on corporate earnings, particularly for domestically focused UK mid-caps, while a softer pound might provide a tailwind for exporters but complicate inflation targets.
O que observar: The next key triggers are the UK's Spring Budget (likely March 2025) and the Bank of England's May 2025 Monetary Policy Report. Any further downward revision from the OECD or the Office for Budget Responsibility could prompt a reassessment of UK sovereign risk and trigger gilt volatility.
Frequently asked questions
How does the OECD downgrade affect UK gilt yields?
Lower growth expectations typically reduce the risk of near-term rate hikes, which can push short-term gilt yields lower. However, if the downgrade is seen as structural, long-term yields may rise on increased borrowing concerns.
Should I adjust my exposure to UK equities based on this?
Investors may consider reducing holdings in UK domestic cyclicals (e.g., retailers, housebuilders) and increasing allocation to global earners that benefit from a weaker pound, such as FTSE 100 multinationals.
What does this mean for the GBP/USD exchange rate?
A softer growth outlook tends to weigh on sterling, especially if the Bank of England is perceived as more dovish than the Federal Reserve. The pound could test support near $1.25 in the coming months.
Reporting contributed by BBC Business — BBC Business · Título original: "UK economy will grow by less than expected next year, OECD says"
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