UK Economy forecast – September 2024
- UK inflation could rise to 3% in early 2025.
- Bank of England to take a more cautious approach to easing monetary policy, taking the base rate to 3.5% by the end of 2025.
- UK GDP growth is expected to have slowed in the second half of 2024, but could pick up slightly to grow by 1.2% in 2025.
- UK consumers continue to adopt a cautious approach to spending, while building up savings at a historically significant pace.
- Business investment is expected to gradually recover as the effect of successive interest rate cuts and the improving growth outlook gives businesses the confidence to commit to investment plans.
For our full UK economy forecast, read the UK Economic Outlook – September 2024.
KPMG forecasts for the UK: GDP, inflation and unemployment
|
2023 |
2024 |
2025 |
Real GDP |
0.1 |
1.0 |
1.2 |
Inflation |
7.3 |
2.6 |
2.5 |
Unemployment rate |
4.0 |
4.3 |
4.4 |
Base interest rate |
5.25 |
4.75 |
3.50 |
Source: ONS, KPMG forecasts. Note: 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.
UK inflation and interest rates: not out of the woods yet
UK inflation is projected to fall below 2% in September but is set to rise again over the coming months, peaking at 3% in early 2025. We’re expecting it to gradually moderate and return to target by the end of 2025.
The Bank of England may favour a gradual series of small cuts to interest rates, taking the base rate to 3.5% by the end of 2025. This contrasts with the Eurozone where growth has been more sluggish, creating an expectation for multiple rate cuts this year. Deeper cuts are also expected in the US following signs of a weakening labour market.
UK GDP forecast: Economy to grow at a modest pace
Following a rebound at the start of the year, UK GDP growth is expected to have slowed again in the second half of 2024, with the economy on course to grow by 1% this year overall. This could pick up slightly to 1.2% in 2025 as a less restrictive monetary policy and continued improvements to real wages could support stronger consumption and business investment.
Longer term GDP growth could be limited in the medium term to around 1.1% a year, due to a historically weak pace of productivity growth.
UK consumer spending: Higher savings one of the headwinds for consumer spending outlook
UK consumers have been putting a significantly higher proportion of their income aside since the pandemic, which may continue dampening spending growth.
Some of the increase in savings could unwind as interest rates gradually fall back to their long-term equilibrium level, but a significant part of the increase in savings could prove more persistent, owing to longer term demographic trends, as well as increased caution in response to a more volatile economic environment.
Investment: Picking up the pace
Overall investment growth is expected to accelerate, as further interest rate cuts reduce the drag on business investment, while the new Government’s focus on accelerating economic growth could also help spur a positive momentum.
We expect that overall investment growth could reach 1% in 2024 and rise to 1.2% in the following year.
UK labour market: Firms could see easier hiring and weaker wage growth ahead
The labour market is continuing to loosen despite robust activity in the UK economy over recent quarters. We’re seeing fewer vacancies, slowing pay growth and a gradual increase in the unemployment rate.
UK public finances: Making ends meet
The Autumn Budget offers a tough test for the new Chancellor as a growing host of spending priorities compete for limited fiscal space even in the event of a minor change to the fiscal rules.
For our full UK economy forecast, read the UK Economic Outlook – September 2024.
