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The EY ITEM Club has revised its GDP growth expectations for 2024 down slightly from 1.1% in July’s Summer Forecast to 0.9%. UK GDP growth is expected to accelerate to 1.5% in 2025, although this is lower than the 2% forecast in July. The downgrade reflects that household savings are now lower than initially thought three months ago, offering less scope for consumers to increase their spending.
Business investment is forecast to accelerate moderately in the coming years as interest rate cuts provide a boost to the private sector. UK business investment is now expected to grow to 1.3% in 2024, up from the 1% projected in the Summer Forecast. Private sector investment is expected to accelerate to 3% in 2025, representing a marginal downgrade from predictions of 3.2% growth in the Summer Forecast.
Matt Swannell, Chief Economic Advisor to the EY ITEM Club,said “Following last year’s technical recession, a strong start to 2024 helped establish the UK’s recovery and a return to steady growth is forecast for next year. However, lower household savings have reduced the scope of potential consumer spending and sticky inflation means that interest rate cuts are set to occur at a gradual pace. This means that growth in 2025 won’t be as robust as it could have been.
“Nonetheless, interest rate cuts should provide a shot in the arm for the private sector and a pickup in business investment is expected to support UK growth in the short term. Combined with a resilient labour market, healthy real incomes and an improvement in consumer spending, UK economic growth should step up in 2025.”
Hywel Ball, EY UK Chair, said “After a prolonged period of economic uncertainty, we should see the business environment improve in 2025 and beyond, thanks to falling interest rates and increased consumer spending. It’s encouraging to see that private sector investment is expected to increase substantially from next year and this should support a welcome return to more moderate levels of growth. All eyes will now be on the Autumn Budget and on how the Chancellor approaches the UK’s challenging fiscal constraints, while also giving companies the confidence needed to unlock further business investment.”
The EY ITEM Club expects the Monetary Policy Committee (MPC) to cut the Bank Rate by a further of 150 basis points by the end of 2025 and predicts the next reduction will come at its November meeting.
Mortgages respond to changes in financial conditions at a far slower pace than corporate liabilities, which means that the gradual pace of Bank Rate cuts is unlikely to provide some consumers with the same level of boost experienced by businesses. Moreover, the continued lagged effects of previous Bank Rate hikes mean looser monetary policy will offer only modest economic support through 2025 and 2026.
Inflation is forecast to average 2.6% in 2024 before declining slightly to 2.5% in 2025 and to 2.1% in 2026. This ‘stickiness’ is due to a combination of factors, including tightness in the labour market, and the gradual slowing of pay growth.
While spending growth is expected to be lower than previously expected due to lower household saving rates, the EY ITEM Club nonetheless expects consumer spending to increase by 0.8% in 2024, consistent with predictions in the Summer Forecast. Looking further ahead, consumer spending is forecast to rise to 1.9% in 2025, a downgrade on the 2.5% predicted in July.