UK economic outlook

The UK economy grew by just 0.1% in Q3 2024 as the services sector, which was the key driver of UK GDP growth in the first half of the year, stalled. We expect growth to remain subdued in the near term, recording a rate of 0.9% this year before UK growth picks up gradually over the next few years towards the long-run potential growth rate of around 1.7%. The near-term outlook has been dampened by the autumn Budget, as higher government spending and investment growth fail to mitigate the negative impacts on business investment and household consumption.

UK economic activity will be supported by greater consumer spending over the medium term due to strong wage growth, leading to gradually improved consumer confidence. The labour market remains tight despite a recent increase in the unemployment rate, which will support real wages to remain positive throughout the forecast period.

The UK economy is set for an extended period where prices grow at a rate above the inflation target due to higher energy prices, alongside sticky services inflation due to strong pay growth. Nonetheless, the Monetary Policy Committee are expected to press ahead with further interest rate cuts as long as progress continues to be made with core inflation, bringing interest rates down gradually to around 2.75% over the next couple of years.

The US election result provides risks to the economic outlook due to tariffs and potential global trade tensions, which could hurt global activity and UK exports. Government policy, such as public sector productivity growth of 2% and the forthcoming industrial strategy, are positive risks to the forecast. Still, attempts to bring down immigration could hurt firms that already face skills shortages across the labour market.