UK economic outlook

The UK economy grew by 0.7% in Q2 2024, the second consecutive quarter of strong growth after a technical recession. However, this growth figure, aided by strong rates of government spending, masks ongoing weakness in UK GDP, as household consumption remains lower than in Q2 2023, and business investment continues to fall. Indeed, the UK economy failed to grow in July for the second consecutive month.

However, consumption should continue to recover as strong wage growth continues to outstrip inflation. Indeed, consumer confidence has picked up recently despite a softening in the labour market. The improvement in real incomes will be a key driver of economic growth in the year ahead, while the labour market will begin to tighten again towards the end of the year.

Despite pay growth remaining positive in real terms, wage pressures should continue to ease, reducing services inflation sufficiently to allow the Bank of England to proceed with further interest rate cuts. However, they will continue to take a cautious approach, given that headline inflation is expected to remain above target for much of the next year, partially due to energy price volatility.

The new Labour government will have its first fiscal event in October, and it has signalled the need for tax hikes to deal with a black hole in the public finances. The Labour government hopes that it can boost investment and economic growth through policies like planning deregulation and a new industrial strategy to improve the fiscal position over time.