EY downgrades growth expectations for UK economy in 2024

The UK economy is now expected to grow by only 0.9% in 2024, down from the 1.1% growth projected in July’s Summer Forecast, according to the new EY ITEM Club Autumn Forecast. The EY ITEM Club has revised its GDP growth expectations for 2024 due to lower than expected increases in consumer spending and cautious cuts to the Bank Rate. UK GDP growth is expected to accelerate to 1.5% in 2025, although this is lower than the 2% forecast in July. The downgrade reflects that household savings are now lower than initially thought three months ago, offering less scope for consumers to increase their spending. Business investment is forecast to accelerate moderately in the coming years as interest rate cuts provide a boost to the private sector. UK business investment is now expected to grow to 1.3% in 2024, up from the 1% projected in the Summer Forecast. Private sector investment is expected to accelerate to 3% in 2025, representing a marginal downgrade from predictions of 3.2% growth in the Summer Forecast. Matt Swannell, chief economic advisor to the EY ITEM Club, said: “Following last year’s technical recession, a strong start to 2024 helped establish the UK’s recovery and a return to steady growth is forecast for next year. However, lower household savings have reduced the scope of potential consumer spending and sticky inflation means that interest rate cuts are set to occur at a gradual pace. This means that growth in 2025 won’t be as robust as it could have been. “Nonetheless, interest rate cuts should provide a shot in the arm for the private sector and a pickup in business investment is expected to support UK growth in the short term. Combined with a resilient labour market, healthy real incomes and an improvement in consumer spending, UK economic growth should step up in 2025.” Hywel Ball, EY UK chair, added: “After a prolonged period of economic uncertainty, we should see the business environment improve in 2025 and beyond, thanks to falling interest rates and increased consumer spending. It’s encouraging to see that private sector investment is expected to increase substantially from next year and this should support a welcome return to more moderate levels of growth. “All eyes will now be on the Autumn Budget and on how the Chancellor approaches the UK's challenging fiscal constraints, while also giving companies the confidence needed to unlock further business investment." Meanwhile, inflation is forecast to average 2.6% in 2024 before declining slightly to 2.5% in 2025 and to 2.1% in 2026. This is due to a combination of factors, including tightness in the labour market, and the gradual slowing of pay growth. While spending growth is expected to be lower than previously expected due to lower household saving rates, the EY ITEM Club nonetheless expects consumer spending to increase by 0.8% in 2024, consistent with predictions in the Summer Forecast. Looking further ahead, consumer spending is forecast to rise to 1.9% in 2025 – a downgrade on the 2.5% predicted in July. The UK labour market has loosened in recent months but remains tight, with hiring slowing and vacancies returning to pre-pandemic levels. However, employment growth is forecast to be steady and the EY ITEM Club expects unemployment to stabilise and average 4.2% in both 2024 and 2025. Swannell said: “Tighter fiscal policy could also offset the limited support offered by interest rate cuts. The new UK government inherited fiscal plans where the tax burden is set to rise while spending as a share of GDP falls. The government’s pre-election manifesto didn’t include proposals to change this and so our forecast assumes fiscal policy will continue to tighten. “However, the Chancellor could adjust the fiscal rules at the Autumn Budget, which would increase the scope for government investment and could boost growth over 2025 and beyond. At the same time, the Budget could introduce additional tax rises required to finance future spending commitments.”

EY downgrades growth expectations for UK economy in 2024

The EY ITEM Club has revised its GDP growth expectations for 2024 due to lower than expected increases in consumer spending and cautious cuts to the Bank Rate

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