There are sunnier times ahead for the UK economy according to one of the City’s most closely watched forecasts, which today predicted better growth and interest rates under 5% by the end of the year.
The EY Item Club’s hotter summer outllook was “a significant upgrade” it said, compared with its last update in spring. It now expects growth of 1.1% for 2024, up from the 0.7% predicted in April.
Hywel Ball, EY’s UK chair, said: “The UK’s economic recovery is under way,” adding: “With inflation predicted to remain relatively stable and consumer spending set to climb, growth should continue … but it’s expected to be more steady than spectacular”
There was also renewed hope for borrowers, who have been dealing with the impact of the 16-year high on Bank of England interest rates at 5.25%, which sets the cost of millions of mortgages and other variable-rate loans and has been in place since August 2023.
Today’s forecast predicted that the BoE would be able to cut rates to 4.75% by the end of the year.
It also backed the City consensus that the first reduction since the pandemic would come in September. It expects the second cut in November.
Such moves would free up spending and help to protect the improved levels of growth. But BoE policymakers will watching inflation, which their run of 14 consecutive rate hikes tamed from its peak over 11% in October 2022.
The consumer price index (CPI) only returned to the Bank’s 2% target in May, and there were signs of sticky-looking wage growth in the most recent data.
EY’s update predicted the “slowdown in wage growth” would “persist” and that “real household incomes are expected to continue to rise substantially thanks to lower inflation”.
It said that CPI would “remain around the 2% target over the coming years, with an average of 2.5% in 2024, falling to 2.2% in 2025. “This is expected to boost household spending power, which in turn is forecast to be the main driver of stronger economic activity for the UK over the next two years,” it added. .
But the survey also pointed to the “lagged effect of past monetary policy tightening”. It warned: “Nearly four million borrowers are set to see mortgage costs rise by the end of 2026 and while this should be manageable for most homeowners, it is still predicted to limit the pace of growth.”
And tight public spending plans could also drag, with the new government promising to stick to fiscal rules restricting its borrowing.
“This will mean the government is likely to implement previously planned tax rises and maintain a low level of public sector spending, which could include cutting the level of UK public investment over the next five years,” the research warned.
Nonetheless, the overall picture continues to improve, with growth hitting 2% in 2025 and staying there for 2026.
The rosier outlook comes after a “stronger than expected start” to this year, which came with an improved outlook for corporate spending.
Ball said: “Brighter conditions are expected to be matched by a rise in business investment in 2024, followed by an even more significant uptick next year.
“This would continue the UK’s strong post-pandemic performance in private sector investment and, alongside consumer spending, should be a key driver of national growth going forwards.”
