UK economic activity has outperformed expectations, but the outlook remains weak and vulnerable to shocks. Risks to the outlook are skewed to the downside, and stem from more persistent inflation, delayed impact of monetary policy, and structural weakness of labour supply.
Vice Chair and Chief Economist
KPMG in the UK
The UK economy has performed better than expected in 2023.
At the start of 2023, market consensus was that GDP would fall by 1%. Economists are now forecasting growth of 0.5% – in line with our own forecast.
On a year-to-date basis, business investment grew by 6.3% in Q3 2023. Household consumption – the main engine of growth in normal times – was up by 0.3%, but it’s still some way below its pre-pandemic level. That’s largely a result of successive negative shocks to real incomes.
Modest GDP growth of 0.5% in 2024
We expect GDP to continue to grow at a modest pace of 0.5% in 2024, and only to pick up towards its steady-state rate of around 1% in 2025.
A big question that could face businesses in 2024 will be whether to continue raising prices to repair margins or cut back on staff if demand is projected to remain weak in some sectors. Both of these scenarios materialising at the same time could result in a double blow to household real incomes.
UK inflation no longer an outlier among major economies
Headline CPI inflation dropped to 4.6% in October on the back of lower energy prices. That means the UK is no longer an outlier when compared to other major economies. But domestic influences – including a tight labour market, strong services price inflation, and firms passing on higher costs to consumers – continue to keep core inflation elevated.
The labour market remains tight
The vacancy rate remains at 4% or above in sectors such as hospitality and healthcare, while nominal pay growth was close to 8% in September. The unemployment rate sat at just 4.2% in October, although recent issues related to data quality add more uncertainty around the current state and near-term trajectory of the labour market.
Boosting labour market participation would help the country economically. And more could be done to assist that process, such as making further reforms to childcare support and raising the state pension age.
Bank of England needs confidence on inflation before reducing interest rates
The current level of interest rates, at 5.25%, remains above our estimate of the equilibrium rate of around 3%. We expect the Bank of England to only normalise policy when it’s confident that inflation is firmly on target. That’s unlikely to happen before the latter part of 2024.
Prospects for the global economy
For our full analysis of the UK economic outlook, and the prospects for a further 36 countries and economic areas, read our Global Economic Outlook, December 2023.