| The UK economy has shifted from a period of stagnation, high inflation and recession to a more welcome environment of apparent growth. Although describing this as a ‘Goldilocks’ period might be overstating things, conditions are favourable for growth over the next 18 months. And although inflation is expected to rise, real incomes and consumer confidence are on the upswing, boosting spending. |
| Political stability, falling interest rates and growing demand are enhancing business confidence and investment. Economic growth is forecasted at just over 1% this year and nearly 1.5% in 2025. But the upcoming budget, the first of the new Labour government, could present a risk to this prosperous environment. Implementing spending cuts and tax rises could weigh down on growth. However, this most likely won’t give the BoE reason for concern, as there is still room to cut interest rates without fuelling inflation. |
| Economic growth is expected to slow slightly in the second half of the year, transitioning from being driven by government spending to consumer spending and business investment, as real incomes and confidence rise and interest rates fall. While initial growth this year was largely government-led, with significant increases in government spending, the drivers of growth are set to shift. Rising real incomes, tax cuts, and falling interest rates are boosting household disposable income, which is expected to increase consumer spending later this year and into 2025. Real incomes are now back to pre-cost-of-living crisis levels and wage growth is outpacing inflation, reducing the impact of interest costs on spending. |
| Business investment is also expected to pick up, supported by high business confidence and increased net external financing. These factors should sustain private sector momentum, offsetting reduced government spending and contributing to economic growth into 2025. GDP is forecasted to grow by around 0.3% per quarter over the next two years, a notable improvement from recent years. However, a challenging budget in October with significant tax increases could dampen the economic recovery by reducing household disposable income and consumer confidence, and potentially discouraging business investment. If higher taxes fund increased government spending, the net impact might be limited, but the expected recovery in consumer spending could be weaker than anticipated. |
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UK quarterly economic outlook – Q3 2024 |
