The UK’s prolonged period of economic stagnation should begin to fade this year as falling inflation, potential interest rate cuts and tax reductions create momentum for growth in 2024 and 2025, according to the new EY ITEM Club Winter Forecast.
GDP expectations for 2024 have been upgraded from 0.7% in October’s Autumn Forecast to 0.9%, while the UK economy is now forecast to grow by 1.8% in 2025, up from 1.7% predicted in October. However, despite the economy faring better in 2023 than was initially expected twelve months ago, the EY ITEM Club now predicts that UK GDP grew by just 0.3% last year, down from the 0.6% predicted in the Autumn Forecast.
Inflation is now expected to end the year lower than previously thought. The EY ITEM Club Winter Forecast projects that Consumer Price Index (CPI) inflation will fall to the Bank of England’s 2% target by May, while averaging 2.4% throughout 2024. This is lower than the 2.9% predicted in the Autumn Forecast, suggestinga more positive outlook for real household incomes.
The improved outlook for inflation should enable a more significant reduction in the Bank Rate in 2024. The EY ITEM Club is forecasting 100-125 basis points of cuts this year, up from the previous projection of 100 basis points in the Autumn Forecast. The EY ITEM Club continues to expect rate cuts to begin in May 2024.
Commenting on this, EY UK chair, Hywel Ball, said: “While challenges remain, the forecast suggests that the UK’s period of economic stagnation is slowly coming to an end. Households and businesses are still facing a tough outlook in 2024, due in part to the lagged effect of interest rate rises, but slowing inflation and anticipated Bank Rate cuts should help build economic momentum as the year progresses.
“Business investment, which has been disappointing for some time, is also expected to see a resurgence in the medium term. A modest contraction is forecast for 2024, but this should be followed by a revival in capital expenditure in subsequent years. Falling inflation and declining market interest rates, coupled with the potential for additional tax cuts in the Chancellor’s Spring Budget, suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth.”
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