Britain's economy will benefit from lower inflation and lower interest rates in the second half of this year, boosting growth and allowing the government to deliver pre-election benefits, according to research from leading forecasters.
EY Item Club, an advisory business backed by accountancy firm EY, has given Rishi Sunak a boost for the new year with its winter outlook, saying the long period of economic stagnation “should start to fade this year due to inflation and lower potential interest rates”. said. Tax cuts and cuts create momentum for growth in 2024 and his 2025. ”
Mr Sunak and Prime Minister Jeremy Hunt said last week that March's budget statement was likely to include tax cuts, given the National Insurance cuts promised in the Autumn Statement last November and which came into effect on January 6. suggested.
If the economic recovery progresses as expected, further tax cuts could be included in the autumn 2024 statement before the general election, expected by the end of the year.
The report dismissed the possibility of a recession in the second half of last year or another three months of negative growth in the first quarter of 2024, saying basic signs of recovery would soon emerge.
In the company's autumn outlook, the 2024 gross domestic product (GDP) growth rate of 0.7% has been revised upward to 0.9%, and the UK economy is expected to grow by 1.8% in 2025, up from the 1.7% forecast in October. ing.
The growth rate was cut to 0.3% from 0.6% last year, underscoring the loss of momentum in the second half of this year due to continued high inflation and sharp rises in interest rates.
However, a recession is still possible if the economy shows signs of recovery in the fourth quarter of 2023 after contracting by 0.3% in the third quarter. Several economists said last week that an unexpected 3.2% drop in retail sales in December revealed weakness in consumer spending and could set the economy back in the fourth quarter.
Financial markets expect the situation to improve if inflation, which averaged more than 6% in 2023, falls to 2% by April as expected and the Bank of England starts cutting interest rates in June.
Seven out of 14 sectors of the economy reported growth in demand as measured by new orders in December 2023, more than double the number in November 2023, according to a Lloyds Bank report. Ta.
A recovery in the moribund real estate market, strong demand for flights and vacations, and rising disposable income after a long period of weakness are all believed to have boosted business confidence.
“Business optimism has reached its highest level since May, with 12 out of 14 sectors reporting higher confidence in their production outlook for 2024 compared to the same period last year,” the report said. .
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Simon French, chief economist at brokerage Panmure Gordon, said the UK's economic outlook had “improved markedly” over the past 12 months, despite fears of a recession last year and a weak Christmas shopping season. .
EY Item Club said interest rates should fall from 5.25% to 4% by the end of the year.
Martin Beck, the club's chief economic adviser, said: “While there is still a chance that the UK could slip into a technical recession in the fourth quarter of 2023, the mood music around the economy is understandably improving.” Ta.
“High inflation and high borrowing costs have recently been the biggest impediments to growth, but both are showing encouraging signs of subsidence and the outlook looks brighter for the second half of 2024 and beyond.”
But he warned that global events risked tainting his forecasts. “Ongoing geopolitical tensions could lead to higher energy prices, which could slow the decline in inflation and increase costs for households and businesses.
“Furthermore, although the Bank of England is expected to cut interest rates this year, the timing and extent of any cuts remain uncertain, and continued high interest rates could prolong fiscal strains. This should tell us a lot about the prospects for a return to growth in the medium to long term.”
