UK economy to accelerate in 2025, EY says

Growth is predicted throughout 2024 before accelerating in 2025 thanks to falling inflation, higher consumer spending and anticipated reductions in interest rates,according to the new EY ITEM Club Spring Forecast. The EY ITEM Club now expects GDP growth of 2% in 2025, up from 1.8% in January’s Winter Forecast. However, the growth forecast for 2024 from EY ITEM Club has been downgraded from 0.9% to 0.7% as the lagged effects of the 2023 technical recession continue to be felt this year. While it is uncertain whether Consumer Price Index (CPI) inflation will decline to the Bank of England’s 2% benchmark in April due to sticky services inflation, the EY ITEM Club expects it to do so by the second half of 2024, thanks to falling prices of wholesale energy, as well as slowing inflation of food and goods prices. The EY ITEM Club then expects inflation to average just below 2% for the rest of the year. However, despite an improving inflationary outlook, the EY ITEM Club now expects Bank Rate to end 2024 at 4.50% following 75 basis points (bps) of cuts across the remainder of this year – a less significant reduction compared to the 125 bps of cuts predicted in January’s Winter Forecast. Hywel Ball, EY UK chair, said: “Although growth in 2024 is forecast to remain subdued, we still expect this year to mark a turning point for the UK economy and provide a launchpad for a far brighter 2025. High inflation, energy prices and interest rates have mired the UK in economic stagnation in recent years but all three obstacles to growth have now either fallen away already or are expected to diminish in 2024. “Business investment is predicted to see modest growth this year before accelerating in 2025. Rising business confidence and spending, alongside improved economic conditions, should set the stage for a welcome return to growth in the near future.” In addition, prospects for business investment in 2024 are on an upward trajectory, according to the EY ITEM Club Spring Forecast. Growth of 0.6% is now expected in 2024, which represents a significant improvement on expectations of a 1% decline in January’s Winter Forecast. However, the fact that interest rates currently remain high is expected to limit the potential scope of growth this year. Meanwhile, the EY ITEM Club continues to expect 3.2% growth in business investment in 2025. The anticipated cuts to the Bank Rate are expected to reduce existing business debt costs, while encouraging more investment activity going forward. Peter Arnold, EY UK chief economist, said: “The UK may have slipped into a mild technical recession at the end of 2023, but there are still indications that the UK’s extended period of economic stagnation has already started to draw to a close. Falling inflation and interest rates, alongside tax cuts, should help unlock growth in consumer spending, house prices and real incomes. “While 2024 isn’t expected to be a year of enormous economic momentum, it should provide a stepping stone to a far brighter 2025.” Arnold added: “The UK’s performance so far this year suggests that stagnation is lifting, with activity surveys signalling a return to growth across various sectors and improved consumer confidence. “The Bank of England’s next set of forecasts in May should show a period of below-target inflation and we believe that Bank Rate cuts could follow as early as June, with a total of up to 75 basis points of cuts this year. As well as alleviating some of the financial pressures on households, this should also create a more positive environment for business investment.”