Hywel Ball, EY UK Chair, comments: “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.”
Consumer spending and house price growth expected in 2024
The EY ITEM Club Spring Forecast brings welcome news for homeowners, with house prices predicted to grow by 1.3% this year. Property prices are then forecast to increase by a further 2% in 2025. The recent fall in mortgage rates has put a floor under prices, which have shown more resilience than expected at the start of 2024. The EY ITEM Club therefore expects an improving economy to drive a steady recovery in house prices this year and in 2025.
In line with expectations for GDP, growth predictions for consumer spending in 2024 have been downgraded from 0.9% to 0.7% due to a weaker-than-expected end to 2023. However, 2025 is forecast to see more substantial growth of 2.2% with the anticipated fall in interest rates likely to prompt households to borrow more and save less.
According to the Spring Forecast, the unemployment rate is expected to edge up slightly due to the lagged effect of a weaker-than-expected end to 2023 on business hiring decisions. However, as the economy begins to recover, unemployment should remain low by historic standards.
Peter Arnold, EY UK Chief Economist, comments: “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.
“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.”
Challenges persist for business investment, but longer-term outlook is improving
According to the EY ITEM Club Spring Forecast, prospects for business investment in 2024 are on an upward trajectory. 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.
Risks to the forecast
The most significant risk to the EY ITEM Club Spring Forecast is the potential effect of ongoing geopolitical tensions, which may push up energy prices. In this scenario, inflation may remain elevated, which could in turn have a marked knock-on effect on interest rates, GDP expectations and household spending power. Furthermore, while the EY ITEM Club expects the Bank of England to cut rates in 2024, there is no guarantee on the timing and extent of these reductions. Finally, an impending general election means the future path of government fiscal policy isn’t clear beyond 2025, which presents a significant unknown for longer-term forecasting.