Consumer spending expected to improve but fiscal policy could limit growth

A forecast from EY ITEM Club expects solid household income growth and a less cautious approach from consumers going forward, to result in 0.8% growth in consumer spending this year, and 2.5% in 2025.

While prospects for consumer spending appear relatively positive, they are likely to be tempered by the lagged effect of past monetary policy tightening on households. Nearly four million borrowers are set to see mortgage costs rise by the end of 2026 and while this should be manageable for most homeowners, it is still predicted to limit the pace of GDP growth.

Tight fiscal policy is also expected to limit GDP growth. The new UK Government has pledged to follow the existing fiscal rule which requires reducing the public sector net debt-to-GDP ratio in the fifth year of the rolling forecast. This will mean the Government is likely to implement previously planned tax rises and maintain a low level of public sector spending, which could include cutting the level of UK public investment over the next five years.

Peter Arnold, EY UK Chief Economist, said “Improved consumer spending will help power economic momentum in 2024 and into next year, but government and business spending will also have a significant effect on growth. By upholding the net debt rule and initially presenting a range of relatively modest, fiscally-neutral measures, the new UK government appears to be maintaining the tight fiscal approach established by the previous administration. This will likely keep public investment comparatively low, restraining GDP growth in the short term and limiting growth potential further into the future. The policies unveiled in the coming months, particularly those announced at the Autumn Budget, will determine whether UK GDP exceeds this forecast and moves from restrained to faster levels of growth.

“Combining higher public investment with a concerted effort to build on the UK’s recent success in business investment could provide an economic shot in the arm. The new Government has an opportunity to reassert the UK’s reputation as an appealing, politically stable destination for private sector capital, and investors will likely pay close attention to the coming months of policy discussions, particularly in areas such as planning reform. This has been promised by previous governments, but meaningful change to the planning system could accelerate the rate at which major projects move from concept to construction, providing investors with greater confidence in the UK’s ability to provide timely returns.”