UK economy shows signs of ‘renewed momentum’, KPMG says

Following a technical recession in the second half of 2023, the UK economy has shown “tentative signs of renewed momentum”, with growth of 0.5% expected this year, and 0.9% in 2025, according to the latest KPMG Global Economic Outlook.

The report finds a number of reasons for optimism, with consumption being supported by the cuts to National Insurance contributions, which are expected to boost real household disposable income by 1%. 

Against this backdrop, consumer confidence is gradually recovering, consistent with continued tightness in the labour market and further falls in inflation. Further improvements in underlying inflationary pressures will favour a gradual withdrawal of monetary policy restrictiveness in the coming months, and Bank Rate is forecast to fall towards 3% by the second half of 2025.

According to KPMG, the fiscal reality is similar for whichever party wins the general election on 4 July. Interest rates are set to remain higher, debt more difficult to bring down, and spending pressures on health and defence continue to mount. With relatively subtle differences in the stated plans for fiscal rules and taxation so far, borrowing will likely follow a similar path under either government.

Yael Selfin, chief economist at KPMG UK, said: “While households have benefitted from a pickup in real earnings and a relatively stable labour market, business investment could also return as an engine of growth. Political uncertainty will now resolve sooner with a summer election and a potential fiscal event in the autumn, setting out the new government’s economic agenda. 

“This could be aided by gradual cuts in interest rates, which look likely despite a small rise in inflation above its target expected later this year. To stay ahead, successful businesses will have to aptly navigate this evolving economic landscape.”

KPMG is forecasting global growth to slow from 2.7% 2023 pace to 2.5% in 2024 and rebound to 2.7% next year. Meanwhile, inflation is expected to continue to cool, but price pressures will take longer to unwind than they took to emerge.

The latest predictions also reflect the current elevated geopolitical uncertainty – armed conflict and trade tensions are flaring in numerous parts of the world, which could fuel more isolationist policies. The resulting risk could be more frequent bouts of inflation and the possibility of sharper shifts in monetary policies. 

A slower expected glide path on rate cuts by the US Federal Reserve, which plays an outsized role in global financial markets, will have a larger impact on rate decisions by developing economies. To further complicate matters, foreign exchange markets have also been reacting to unexpected election outcomes.

Despite uncertainty deepening this year, KPMG’s economists remain cautiously optimistic about the outlook. 

Selfin concluded: “Global economic prospects are better for 2025, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisition activity could also continue to gather steam, as financial conditions ease and dry powder is deployed. 

“However, the uncertainty remains around the political shifts, which could see more insular and protectionist economic policies.”