New forecasts from consultancy KPMG suggest the UK economy will grow faster than previously expected.
The upgraded forecast brings positive news amidst ongoing economic challenges.
Revised GDP Growth Projections
KPMG has adjusted its prediction for the UK’s GDP growth. Earlier, a modest increase of 0.3% was anticipated for this year. The latest estimate, however, suggests a growth rate of 0.5%. This is a notable increase from the previous year’s mere 0.1%.
The projections for 2024 have also seen an upgrade. Growth is now expected to be 0.5%, up from the previous forecast of 0.3%. By 2025, KPMG anticipates the economy to expand by 0.9%, supported by interest rate cuts from the Bank of England as inflation eases.
Economic Turnaround After Difficult Years
According to KPMG, the UK economy is ‘turning a corner’ after tough times since the pandemic’s onset in 2020.
Several factors have hindered economic progress. High inflation, rising interest rates, and increased living costs due to global energy price hikes following Russia’s invasion of Ukraine have all played a role.
Yael Selfin, KPMG UK’s chief economist, highlighted the importance of political stability in economic recovery. She said, ‘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.’
Inflation and Interest Rate Developments
The UK’s inflation rate has recently dropped to the Bank of England’s 2% target for the first time since July 2021.
Additionally, the Office for National Statistics revised its estimate for the first-quarter GDP growth to 0.7%, from 0.6%. This positive revision fuels optimism for the future.
On August 1, the Bank of England is expected to commence interest rate cuts. KPMG predicts that diminishing price growth could result in several base rate reductions over the next 18 months.
Fiscal Challenges for the Next Government
Despite the positive growth outlook, KPMG has issued a cautionary note. The next government will face a challenging fiscal environment.
Interest rates are anticipated to remain higher, and reducing debt will prove difficult amidst increasing expenditure pressures on health and defence sectors. Spending cuts in unprotected government areas, like local government and the justice system, may follow.
Both Labour and the Conservatives have faced criticism for neglecting public finance strain during the election campaign. Their current fiscal plans imply significant challenges ahead, regardless of the election outcome.
Potential Policy Responses
Jeremy Hunt’s March budget points to real-terms cuts of about £20 billion in unprotected government departments. This could impact local governments and the justice system heavily.
Neither Labour leader Starmer nor Prime Minister Rishi Sunak has proposed increases to key revenue sources like income tax, national insurance, and VAT. This limits the options for the incoming administration.
Labour leader Starmer has pledged to stabilise economic policymaking. He emphasises economic growth through planning system reforms, which could generate funds to support public services.
Interest Rate and Economic Policy Outlook
KPMG’s forecasts bring hope but also highlight realities. The Bank of England’s base rate, currently at a 16-year high of 5.25%, might drop to 3% next year.
This decline is expected as inflationary pressures ease further. However, KPMG stresses that the economic landscape remains tough, with fiscal constraints and spending pressures remaining critical.
Political promises and policies will need to adapt to new economic realities, making the upcoming election a critical juncture for the UK’s financial future.
Looking Ahead
The UK’s economic outlook appears cautiously optimistic. Growth forecasts are improving, and inflation is being brought under control.
Nevertheless, fiscal challenges and political uncertainties continue to loom large. As the country navigates through these, the government’s economic strategies will be key to long-term stability.
In summary, KPMG’s upgraded growth forecasts provide a glimmer of hope for the UK economy.
However, significant fiscal challenges lie ahead for the next government, emphasising the need for robust economic strategies and policy adaptations.