UK economy limping along while high interest rates and policy uncertainty take their toll on global growth

• Activity has outperformed expectations, but the UK economy remains weak and vulnerable to shocks.
• Risks to the UK outlook are skewed to the downside, and stem from a more persistent inflation, delayed impact of monetary policy, and structural weakness of labour supply.
• Deceleration in growth in some of the world’s largest economies, coupled with little impetus elsewhere, could see global GDP growth easing slightly in 2024.
• Weaker momentum should help push down inflation, with average world inflation expected to halve by 2025.

The UK economy has performed better than expected this year, but the outlook remains weak and vulnerable to shocks. UK GDP is expected to continue to grow at a modest pace of 0.5% this year and next, and only pick up to 1.0% in 2025, according to the latest KPMG Global Economic Outlook.

Despite the peak in inflation being behind us, a large part of the impact from higher interest rates on mortgage holders is still to come, which will put downward pressure on housing activity and consumption, and will continue to depress growth.

Headline CPI inflation dropped to 4.6% in October on the back of lower energy prices, which means that the UK is no longer an outlier when compared to other major economies. However, domestic influences continue to keep core inflation elevated, including tightness in the labour market, strong services price inflation, and firms passing on higher costs onto consumers.

KPMG forecasts for the UK

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 the UK economy is resilient, it needs to get its mojo back. We expect monetary and fiscal policies to act as a headwind to growth over the next two years, and a sudden revival in productivity is not likely to come to the rescue. This means that even the expected continuation of positive growth should not be celebrated prematurely, as the outlook is dominated by downside risks.”

Global growth outlook

A significant uplift in global growth is unlikely in 2024 with no short-term end in sight to geopolitical uncertainty and tight monetary policies, according to the latest forecast from KPMG.

With global trade plateauing in recent years, driven in part by the pandemic, geopolitical tensions and rising protectionist measures, the report warns of potentially large output losses from geoeconomic fragmentation over the longer term. KPMG forecasts global GDP growth of 2.2% in 2024 – down from 2.6% in 2023, with a return to 2.6% growth anticipated in 2025. 

Weaker economic momentum has helped ease supply chain pressures and reduce broader cost pressures, with energy prices dropping significantly from their 2022 peak when Russia invaded Ukraine. Median CPI inflation for the G20 countries fell to 3.9% in October 2023 after peaking at 7.7% in July 2022, and further deceleration is expected in coming months.

The report sees world inflation averaging 5.0% in 2024 and 3.9% in 2025, down from an estimated 6.5% in 2023 and 8.0% in 2022. Risks are on the upside, however, as any further shocks to energy prices – or a more persistent domestic inflation in some countries – could derail the relatively smooth return to central banks’ inflation targets next year.

Yael Selfin, Chief Economist at KPMG UK, said:

“Our latest forecast reflects the multiple underlying factors driving uncertainty and sluggish growth across the world. In the short term inflation may be easing, but it’s coming at a cost, with consumer spending dropping and the cost of debt rising.

“Businesses are having to navigate a changing geopolitical environment, new hybrid working preferences, ESG adoption, as well as emerging technologies such as AI and big data. All these changes require increased investment, but most of them could potentially increase productivity and economic growth in the long term.”