The UK economy unexpectedly grew in the final three months of last year following a boost to the construction and services sectors.

The economy expanded by 0.1% between October and December, according to official figures, despite analysts predicting it would contract.

Growth in the quarter was driven by a range of industries, from pubs and bars to machinery manufacturers, having a strong December.

However, the figures also indicated living standards last year were slightly lower than in 2023 on average.

With tax rises coming into force in April, concerns remain that economic growth will remain sluggish for sometime.

Businesses have warned that paying more in National Insurance, along with minimum wages rising and business rates relief being reduced, could affect the economy’s ability to grow, with employers expecting to have less cash to give pay rises and create new jobs.

The Bank of England has also halved its growth forecast for the UK this year, amid concerns that higher costs for employers could hit hiring, profits, investment – and push up prices. Last week, it decided to cut interest rates to 4.5%.

Paul Dales, chief UK economist at Capital Economics, said the economy was “all-but stagnating” as businesses adjusted for higher costs and “more uncertainty overseas” – pointing to the introduction of trade tariffs in the US by President Donald Trump.

He said it was a clear that “a lot of the weakness” in the economy was due to the rise in taxes on firms announced by Chancellor Rachel Reeves in her Budget last year, with “business sentiment on the floor” and investment and consumer spending down.

“Overall, the economy is unlikely to do more than move sideways over the next six months,” he suggested.

But the latest figures showing a return to growth at the end of 2024 will be welcome news for the government, which has made growing the economy its top priority in its effort to improve living standards.

A separate figure from the Office for National Statistics (ONS) measuring living standards fell 0.1% in 2024 compared with the year before. The measure – known as real GDP per head – calculates the volume of goods and services available to the average person in the UK and a person is deemed better off the more they have.

When an economy grows, businesses on average have more money to spend to employ more people or give pay rises. Firms making more profits also pay more in tax to the government, which can be spent on public services.

All this together, in theory, leaves people better off – but it takes time for the benefits to be felt, and it does not necessarily benefit everyone.

In December alone, the economy was estimated to have grown by 0.4%.

Film distribution firms, pubs and bars all had a “strong month”, as did industries involved in machinery manufacturing, according to Liz McKeown, director of economic statistics at the ONS.

However, this was offset by weak months in trade for computer programming, publishing and car sales businesses.

In the construction sector, the final months of 2024 saw an increase in new work driven by new private housing projects, but repairs and maintenance work from private homes fell over the period, suggesting homeowners cut back.

Sushma Solanki, the owner of Bolton catering firm Sushma’s Snacks, told the BBC the economic situation was “very worrying” as she found trading at the end of last year very tough.

“I normally do about 20 to 30 Christmas office events,” she said. “Instead, I did two, which was very hard. People don’t have the money.”

She said she had to let go an employee partly because of the upcoming rise in National Insurance.

“It’s not just the policies, it’s everything. Peppers for my chicken dish started off at 79p, they are £1.85,” she added.

Chris Taylor, the owner of coffee shop Gran T’s in Manchester, said he was “shocked” that there had been any growth in the economy.

“Going into last winter was one of the biggest struggles. I think a lot of people were naturally clinging onto their purse strings. Trade was not there,” he said.

“This government’s action plan, without hitting people directly with higher taxes, is hitting the level above and that effectively is going to hit people one way or another. It is really an indirect punch to the whole economy.”

Following the release of the new figures, the chancellor said she was still not satisfied with the performance of the economy.

“It’s not possible to turn around more than a decade of poor economic performance in just a few months, but we are doing what is necessary to bring stability to the economy,” she said.

Reeves also said the government was going “further and faster” to “put more money in people’s pockets”.

She also reiterated her self-imposed rules on borrowing and debt were “non-negotiable” after reports this week suggested the government’s official forecaster, the Office for Budget Responsibility, had downgraded growth forecasts.

Shadow chancellor Mel Stride said Reeves’s Budget was “killing growth” in the UK.

“Working people and businesses are already paying for her choices with ever rocketing taxes, hundreds of thousands of job cuts and business confidence plummeting,” he added.

Liberal Democrat Treasury spokesperson Daisy Cooper said the chancellor’s Budget was to blame for “pitiful economic growth”.

“Her complete pig’s ear of a jobs tax will hammer small businesses, the backbone of our economy.”

Additional reporting by Peter Ruddick