While the UK’s economic outlook is expected to remain modest this year, growth is predicted to build throughout 2024 before accelerating in 2025 thanks to falling inflation, higher consumer spending and anticipated reductions in interest rates, according to the new EY ITEM Club Spring Forecast.

The EY ITEM Club now expects GDP growth of 2% in 2025, up from 1.8% in January’s Winter Forecast. However, the growth forecast for 2024 from EY ITEM Club has been downgraded from 0.9% to 0.7% as the lagged effects of the 2023 technical recession continue to be felt this year. 

While it is uncertain whether Consumer Price Index (CPI) inflation will decline to the Bank of England’s 2% benchmark in April due to sticky services inflation, the EY ITEM Club expects it to do so by the second half of 2024, thanks to falling prices of wholesale energy, as well as slowing inflation of food and goods prices. The EY ITEM Club then expects inflation to average just below 2% for the rest of the year.

However, despite an improving inflationary outlook, the EY ITEM Club now expects Bank Rate to end 2024 at 4.50% following 75 basis points (bps) of cuts across the remainder of this year – a less significant reduction compared to the 125bps of cuts predicted in January’s Winter Forecast.Since January’s forecast, the Monetary Policy Committee’s (MPC) messaging has suggested that rates may need to stay high for longer. The EY ITEM Club now anticipates that the first rate cut will come in June 2024, amid expectations of a period of below-target inflation.

Commenting on this, EY UK chair, Hywel Ball, said: “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.”

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