Beyond the Headlines: Why UK Economic Data Hints at Unexpected Resilience
The latest official growth figures present what seems like a bleak picture of the UK economy, with GDP expanding by just 0.1% in the final quarter of last year and GDP per head falling by the same amount. Shadow chancellor Mel Stride was quick to label this as evidence that "Labour's choices have weakened our economy," while Liberal Democrat deputy leader Daisy Cooper accused the government of stifling recovery with "anti-growth Budgets." However, a closer examination of the data reveals a more nuanced and surprisingly optimistic story.
Contrasting Perspectives on Economic Performance
Economist Jim O'Neill, a crossbench peer and former Conservative Treasury minister, offered a markedly different interpretation during a recent Radio 4 Today programme appearance. He argued that fourth-quarter growth figures were less significant than some January data points, particularly retail sales, which he described as "surprisingly stronger than people expected." O'Neill highlighted that the annual growth figure of 1.3% for 2025 exceeded consensus expectations from the start of that year. "Of course it is nowhere near strong enough, or good enough, to be impacting normal people," he acknowledged. "But it's actually better."
When asked whether his perspective was optimistic or pessimistic, O'Neill responded: "It's more half full than it's been for some time." This sentiment reflects his observation that "the underlying productivity of the economy is showing tentative signs of finally starting to improve."
Examining the Supporting Evidence
The statistics indeed warrant careful analysis. British Retail Consortium figures show retail sales increased by 2.7% in January, up from 1.2% in December and above the 2025 average of 2.3%. While O'Neill's description of the annual GDP figure being "quite a bit higher" than early 2025 expectations might be slightly exaggerated—the consensus was 1.2% versus the actual 1.3%—the direction is positive.
More significantly, UK productivity—a persistent challenge for recent governments—grew more in the past year than in the previous seven years combined. The latest Labour Force Survey shows a 1.1% rise in productivity, measuring economic output per hour worked. Greg Thwaites, research director at the Resolution Foundation think tank, used payroll data to calculate an even more impressive 3.1% productivity growth over four quarters. "That's not a rounding difference," Thwaites emphasized. "It's the gap between 'solid' and the best non-pandemic year since before the financial crisis."
The Complex Reality Behind Productivity Gains
However, this productivity improvement comes with important caveats. Thwaites noted that while productivity is "genuinely picking up," the gains are partly attributable to workforce reductions rather than purely increased output. With interest rates higher, energy costs elevated, and minimum wage increased, many marginal "zombie businesses" have struggled, leading to layoffs or closures. Unemployment currently stands at 5.1%, the highest in a decade outside pandemic periods.
As output rises slowly while the number of workers decreases, hours worked drop rapidly, contributing to the productivity figures. "The productivity gains are real, but they're coming partly from fewer people working, not just from more output being produced," Thwaites explained. In a healthy economy, this "creative destruction"—as economist Joseph Schumpeter termed it—should see new, more productive businesses replacing those that vanish. Yet this transition isn't occurring smoothly, with mismatches between disappearing jobs and emerging opportunities preventing seamless reemployment.
Additional Positive Indicators Emerge
Beyond productivity, several other economic signals show promise. The S&P Purchasing Managers' Index for services and manufacturing reports the fastest activity increase since August 2024. Nationwide and Rightmove data indicate house prices are rising again, while research company GfK finds consumer confidence has improved for two consecutive months following the Budget.
British Retail Consortium chief executive Helen Dickinson attributed stronger January retail sales to delayed Christmas spending: "A drab December gave way to a brighter January." This shift still represents increased consumer willingness to spend. Chancellor Rachel Reeves' Budget proved less harsh on business than anticipated, encouraging cautious investment from companies and individuals.
Persistent Challenges Remain
Despite these positive signs, significant economic headwinds persist. The retail sales surge includes substantial purchases of gold and silver jewellery—traditional safe havens during uncertain times. More critically, housebuilding faces a "viability crisis" with slow planning permissions, minimal construction activity, and inflation in materials and labor costs exacerbated by skilled builder shortages.
The government's promised planning process acceleration shows little tangible progress, while sluggish demand compounds sector pressures. These factors temper optimism about sustained economic improvement.
A Balanced Economic Assessment
Jim O'Neill's "half full" perspective finds support in multiple data points suggesting underlying economic resilience. Improved productivity, stronger retail performance, rising consumer confidence, and increased business investment all indicate potential for recovery. Yet the mixed nature of productivity gains, persistent unemployment, sector-specific struggles, and cautious spending patterns reveal an economy in transition rather than robust health.
Whether O'Neill's glass remains "more half full than it's been for some time" depends on whether positive indicators translate into broader, sustained improvement across all economic sectors—particularly in critical areas like housing construction where current news remains decidedly gloomy.
