Following a technical recession in the second half of 2023, the UK economy has shown tentative signs of renewed momentum, with growth of 0.5% expected this year, and 0.9% in 2025, according to the latest KPMG Global Economic Outlook.

The report finds a number of reasons for optimism. Consumption has been supported by the cuts to National Insurance Contributions, which are expected to boost real household disposable income by 1%. Against this backdrop, consumer confidence is gradually recovering, consistent with continued tightness in the labour market and further falls in inflation. Further improvements in underlying inflationary pressures will favour a gradual withdrawal of monetary policy restrictiveness in the coming months, and Bank Rate is forecast to fall towards 3% by the second half of 2025.

According to the outlook, the fiscal reality is similar for whichever party wins the general election on 4 July. Interest rates are set to remain higher, debt more difficult to bring down, and spending pressures on health and defence continue to mount. With relatively subtle differences in the stated plans for fiscal rules and taxation so far, borrowing will likely follow a similar path under either government.

KPMG forecasts for the UK

	2023	2024	2025
GDP	0.1	0.5	0.9
Inflation	7.3	2.6	2.6
Unemployment rate	4.0	4.5	4.9

Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Inflation measure used is the CPI and the unemployment measure is LFS.

Commenting on this, KPMG UK chief economist, Yael Selfin, said: “While households have benefitted from a pickup in real earnings and a relatively stable labour market, business investment could also return as an engine of growth. Political uncertainty will now resolve sooner with a summer election and a potential fiscal event in the autumn, setting out the new government’s economic agenda.

“This could be aided by gradual cuts in interest rates, which look likely despite a small rise in inflation above its target expected later this year. To stay ahead, successful businesses will have to aptly navigate this evolving economic landscape.”