UK economy is turning a corner amid softer global growth
A combination of tailwinds to consumption and falling inflation should support
A combination of tailwinds to consumption and falling inflation should support
- A combination of tailwinds to consumption and falling inflation should support modest positive growth in the UK over the remainder of this year and 2025.
- Interest rates expected to drop towards 3% by the end of 2025.
- A summer General Election to resolve political uncertainty sooner, providing support to investment, but neither party will have much fiscal space over the next Parliament.
- Global GDP growth forecast to slip to 2.5% in 2024, returning to 2.7% in 2025.
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.
Yael Selfin, Chief Economist at KPMG UK, commented on the report:
“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.”
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KPMG is forecasting global growth to slow from 2.7% 2023 pace to 2.5% in 2024 and rebound to 2.7% next year. Meanwhile, inflation is expected to continue to cool, but price pressures will take longer to unwind than they took to emerge.
The latest predictions also reflect the current elevated geopolitical uncertainty, with nearly half of the world’s population already voting or heading to the polls this year. Armed conflict and trade tensions are flaring in numerous parts of the world, which could fuel more isolationist policies. The resulting risk could be more frequent bouts of inflation and the possibility of sharper shifts in monetary policies.
A slower expected glide path on rate cuts by the U.S. Federal Reserve, which plays an outsized role in global financial markets, will have a larger impact on rate decisions by developing economies. These markets are more sensitive to exchange rate movements than have been seen in the past. Weakening currencies relative to the U.S. dollar are inflationary for those economies. To further complicate matters, foreign exchange markets have also been reacting to unexpected election outcomes.
Despite uncertainty deepening this year, KPMG’s economists remain cautiously optimistic about the outlook. Yael Selfin concludes:
“Global economic prospects are better for 2025, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisition activity could also continue to gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the political shifts, which could see more insular and protectionist economic policies.”
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Notes to Editors:
About KPMG’s Global Economic Outlook:
KPMG’s Global Economic Outlook provides bi-annual economic forecasts, produced by macroeconomics teams across KPMG’s global network using a suite of external and in-house models capturing the main inter-relationships in the world economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly.
About KPMG UK
KPMG LLP, a UK limited liability partnership, operates from 20 offices across the UK with approximately 18,000 partners and staff. The UK firm recorded a revenue of £2.96 billion in the year ended 30 September 2023.
KPMG is a global organisation of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 143 countries and territories with more than 273,000 partners and employees working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.