The UK economy is expected to benefit from falling inflation and lower interest rates in the latter half of the year, fostering growth and enabling potential pre-election measures, as indicated by a recent study from EY Item Club, a prominent forecasting group. The report anticipates a shift from the prolonged economic stagnation experienced in recent times, citing factors like decreasing inflation, possible interest rate cuts, and tax reductions, which are envisioned to propel growth in 2024 and 2025.
Chancellor Rishi Sunak and Jeremy Hunt hinted at forthcoming tax cuts, building on the national insurance reduction announced in the last autumn statement. The winter forecast suggests that additional tax cuts might be featured in the 2024 autumn statement, paving the way for a general election expected later in the year, assuming the predicted recovery unfolds.
The report dismisses the likelihood of a recession in the latter part of the previous year and a potential three-month period of negative growth in the first quarter of 2024. It maintains that underlying signs of recovery will soon take effect.
The projected increase in gross domestic product (GDP) for 2024 has been revised from 0.7% (autumn forecast) to 0.9%. Additionally, the UK economy is now expected to grow by 1.8% in 2025, up from the earlier prediction of 1.7% in October. Last year’s growth was revised down from 0.6% to 0.3%, indicating a loss of momentum in the second half of the year due to persistent high inflation and sharply increased interest rates.
While a recession remains a possibility, especially if the economy contracted in the fourth quarter of 2023 following a 0.3% decline in the third quarter, the report suggests a positive turnaround with anticipated improvements in inflation and expected interest rate cuts by the Bank of England.
Financial markets anticipate a favorable change once inflation, which averaged above 6% in 2023, drops to around 2% by April, coupled with expected interest rate cuts starting in June.
A report from Lloyds Bank highlights growing demand in seven out of 14 sectors in December 2023, suggesting increased business confidence attributed to a rebound in the property market, elevated demand for flights and holidays, and rising disposable incomes.
Despite concerns about a potential recession and weak Christmas shopping figures, the UK’s economic outlook has markedly improved over the past year, according to Simon French, chief economist at stockbroker Panmure Gordon.
EY Item Club predicts a decline in interest rates from 5.25% to 4% by the end of the year. Chief Economic Adviser Martin Beck acknowledges the positive signals in declining inflation and borrowing costs, but cautions against global risks, such as geopolitical tensions impacting energy prices, potentially hindering the decline of inflation and increasing costs for households and businesses. The timing and extent of expected interest rate cuts by the Bank of England remain uncertain, and continued high rates could prolong financial strain, emphasizing the need for vigilance in the first half of 2024 to assess the UK’s prospects for returning to sustained growth over the medium to long term.
Source: The Guardian