The latest forecast from the EY ITEM Club presents a mixed yet hopeful outlook for the UK economy. While consumer spending is anticipated to see solid growth, tight fiscal policies could temper this progress, affecting the overall pace of economic expansion.
Positive Trends in Consumer Spending
The EY ITEM Club predicts that household income growth and a less cautious consumer approach will drive a 0.8% increase in consumer spending this year, followed by a more robust 2.5% growth in 2025. This optimism is grounded in the expectation that as households feel more financially secure, they will begin to spend more freely, contributing to economic momentum.
Challenges from Past Monetary Policies
However, the positive outlook on consumer spending comes with significant caveats. The lagged effects of previous monetary policy tightening are expected to impact households. Nearly four million borrowers are set to see their mortgage costs rise by the end of 2026. While most homeowners are anticipated to manage these increases, the additional financial burden is likely to limit the pace of GDP growth.
Impact of Tight Fiscal Policy
The new UK Government’s adherence to a stringent fiscal rule, which mandates reducing the public sector net debt-to-GDP ratio within five years, is also poised to constrain economic growth. This commitment suggests that the government will proceed with planned tax rises and maintain low public sector spending, potentially cutting public investment levels over the next five years.
Expert Insights on Economic Growth
Peter Arnold, EY UK Chief Economist, highlighted the dual impact of consumer and government spending on economic growth. He noted, “Improved consumer spending will help power economic momentum in 2024 and into next year, but government and business spending will also have a significant effect on growth. By upholding the net debt rule and initially presenting a range of relatively modest, fiscally-neutral measures, the new UK government appears to be maintaining the tight fiscal approach established by the previous administration.”
Arnold emphasized that this approach is likely to keep public investment low, restraining GDP growth in the short term and limiting potential growth in the future. The government’s upcoming policies, particularly those announced at the Autumn Budget, will be crucial in determining whether UK GDP can exceed current forecasts and achieve higher growth rates.
Opportunities for Enhanced Economic Growth
Despite the constraints, there are opportunities for the government to boost economic growth. Combining higher public investment with efforts to build on recent successes in business investment could significantly enhance economic performance. The new Government has the chance to reaffirm the UK’s reputation as a politically stable and attractive destination for private sector capital. Investors will be watching closely as policy discussions unfold, especially in areas like planning reform, which could accelerate major projects and boost investor confidence.
Conclusion
While the forecast for consumer spending in the UK is promising, tight fiscal policies and the impact of past monetary tightening pose challenges to sustained economic growth. The government’s fiscal strategies and upcoming policy decisions will play a pivotal role in shaping the economic landscape. By balancing increased public investment with measures to encourage business growth, the UK can navigate these challenges and aim for a more robust economic future.
