The UK economy growth forecast downgraded by weak consumer spending

• UK economy is expected to grow 0.9% in 2024, says the new EY ITEM Club Autumn Forecast, down from the 1.1% growth projected in July’s Summer Forecast.
• GDP growth expectations for 2025 have seen a more significant downgrade to 1.5%, down from the 2% predicted in the Summer Forecast.
• Business investment is forecast to grow to 1.3% in 2024 and 3% in 2025. 
• Bank Rate is expected to fall to 3.5% by the end of 2025, although the gradual rate of cuts will offer limited support to UK growth.
• The Government’s Autumn Budget announcement means the course of future fiscal policy is uncertain.

Lower than expected increases in consumer spending and cautious cuts to the Bank Rate mean UK growth will be steady rather than rapid over the next two years, according to the EY ITEM Club Autumn Forecast.

The EY ITEM Club has revised its GDP growth expectations for 2024 down slightly from 1.1% in July’s Summer Forecast to 0.9%. 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, comments: “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, says: “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."

Gradual Bank Rate cuts offer limited support for households

The EY ITEM Club expects the Monetary Policy Committee (MPC) to cut the Bank Rate by a further of 150 basis points by the end of 2025 and predicts the next reduction will come at its November meeting.

Mortgages respond to changes in financial conditions at a far slower pace than corporate liabilities, which means that the gradual pace of Bank Rate cuts is unlikely to provide some consumers with the same level of boost experienced by businesses. Moreover, the continued lagged effects of previous Bank Rate hikes mean looser monetary policy will offer only modest economic support through 2025 and 2026.

Inflation remains stick as consumer spending rises

Inflation is forecast to average 2.6% in 2024 before declining slightly to 2.5% in 2025 and to 2.1% in 2026. This ‘stickiness’ 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.

UK economy update shows a positive outlook for house prices and unemployment

Gradual cuts to Bank Rate are likely to offer some benefits to the UK’s housing market. The EY ITEM Club expects house price growth of 1.7% in 2024, and 2.1% in 2025, with falling borrowing costs expected to help offset other affordability challenges to a certain degree. However, the interest rates on mortgages remain high relative to pre-pandemic norms, reducing the likelihood of more substantial growth in property prices.

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.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, continues: “Looser monetary policy will only have a modest impact on growth in the short term. Many borrowers on fixed rates will not see their mortgage payments fall for an extended period and a significant minority will refinance a fixed mortgage to a higher rate, even as Bank Rate declines. This will only likely start to turn around in 2026 and beyond once households that took out five-year fixed rate mortgages during the pandemic have remortgaged.

“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.” 

Risks to the UK economy forecast

With the Government’s Autumn Budget fast approaching, the exact course of fiscal policy remains uncertain. The EY ITEM Club Autumn Forecast builds in the tax and spending plans outlined by the Government in its manifesto. While it assumes the additional spending identified in the Government’s audit of public finances is partially funded by tax revenue, any potential changes in tax or spending plans beyond this present a risk to the forecast.

Meanwhile, ongoing geopolitical tensions and the outcome of the 2024 Presidential Election in the United States present further risks to the forecast, with the global economic backdrop and its potential impact on UK growth prospects difficult to predict.