Barclays Predicts UK GDP Stagnation: What Rising Yields Mean for Investors and Future Fiscal Policies


Investors should brace themselves for some economic recalibrations as Barclays (NYSE: BCS) has revised its fourth-quarter GDP forecast for the United Kingdom, now predicting stagnation with a growth rate of 0.0%. This downward adjustment, from a previous estimate of 0.1%, comes on the heels of rising UK government bond yields, signaling a more complex financial landscape.
The elevation in gilt yields presents a challenge for the UK Chancellor, Rachel Reeves. Analysts at Barclays have noted that, due to these rising yields, Reeves may have even less fiscal maneuverability than expected. The Office for Budget Responsibility (OBR) is not scheduled to clarify fiscal headroom until March 26, which leaves room for uncertainty and potential volatility in the markets. Should yields unexpectedly decline, the Chancellor could regain some flexibility, but if they remain high, tough fiscal decisions are likely ahead.
In their analysis, Barclays suggests that the most probable avenue for any fiscal adjustment would involve cuts to public spending. A recent statement from Chief Secretary to the Treasury, Darren Jones, highlighted the necessity for public services to "live within their means," hinting at impending austerity measures. Sources within the government have further indicated that Chancellor Reeves might be ready to implement deeper departmental spending cuts as a solution to address these fiscal pressures.
The timing misalignment between the fiscal rules, which span five years, and the spending review of three years adds another layer of complexity. This situation incentivizes Reeves to outline budget cuts for the latter years of the forecast. While such strategies have been employed by previous chancellors, they also risk damaging credibility at a time when market scrutiny is intense, especially given the already tight real-term budget constraints for many unprotected departments.
Barclays maintains its 2024 GDP growth forecast at 0.8% but has reduced its 2025 outlook to 0.9% year-on-year from an earlier estimate of 1.0%. Additionally, the bank continues to anticipate five cuts to the Bank Rate in 2025, should economic conditions permit.
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