The British economy is poised for continued sluggishness this year, as the Bank of England postpones interest rate cuts amidst stubborn inflation, according to a report by the EY ITEM Club. Expectations for GDP growth in 2025 have been revised upward to 2%, a slight improvement from January’s Winter Forecast of 1.8%. However, the growth forecast for 2024 has been downgraded from 0.9% to 0.7%, as the lingering effects of the 2023 technical recession persist.
While uncertainties loom regarding whether Consumer Price Index (CPI) inflation will decline to the Bank of England’s 2% benchmark by April, the EY ITEM Club anticipates a gradual decrease by the second half of 2024. This outlook is bolstered by falling wholesale energy prices and a slowdown in food and goods inflation. However, despite improving inflation projections, the EY ITEM Club now expects the Bank Rate to end 2024 at 4.50%, following a more conservative reduction of 75 basis points (bps) across the year, compared to the 125bps previously predicted.
Hywel Ball, EY UK Chair, acknowledges the subdued growth forecast for 2024 but remains optimistic about the economy’s trajectory. He notes that obstacles such as high inflation, energy prices, and interest rates are expected to diminish in 2024, paving the way for a brighter 2025. Rising business confidence and spending, alongside improved economic conditions, are anticipated to catalyze growth in the near future.
The EY ITEM Club’s Spring Forecast brings some relief for homeowners, with house prices predicted to grow by 1.3% in 2024 and a further 2% in 2025. Despite a weaker-than-expected end to 2023 affecting consumer spending predictions for 2024, a more substantial growth of 2.2% is forecasted for 2025, driven by anticipated interest rate cuts prompting households to borrow more and save less.
Peter Arnold, EY UK Chief Economist, emphasizes the signs of economic improvement despite a mild technical recession at the end of 2023. Falling inflation and interest rates, alongside tax cuts, are expected to unlock growth in consumer spending, house prices, and real incomes. While 2024 may not witness significant economic momentum, it sets the stage for a more promising 2025.
Business investment prospects for 2024 are showing promise, with a projected growth of 0.6%, a notable improvement from the previous forecast of a 1% decline. However, the persistence of high interest rates may limit the extent of growth. Looking ahead to 2025, the EY ITEM Club anticipates a robust 3.2% growth in business investment, buoyed by anticipated Bank Rate cuts reducing existing business debt costs and encouraging more investment activity.
Despite these forecasts, ongoing geopolitical tensions pose a significant risk, particularly in pushing up energy prices, which could elevate inflation and impact interest rates, GDP expectations, and household spending power. Moreover, uncertainty looms over the timing and extent of Bank Rate cuts, while an impending general election adds another layer of unpredictability to longer-term forecasting.
