Year: 2024
Type: article
Abstract: Feature Article: Growth may slow, but the consensus looks too weak◼ The UK grew at an above-trend pace in H1 2024, but we don't expect this to be sustained over the next couple of years.However, we are slightly more optimistic than the consensus.Our forecast that GDP will grow by 1.5% next year is based on the notion that consumers will finally shed their caution and make a stronger contribution to growth.◼ The likelihood that fiscal policy will be tightened over the next five years is a key reason why we expect growth to slow.Our forecast assumes the Chancellor will implement an extra £10bn (0.4% of GDP) worth of tax increases from next year, on top of the measures set out in Labour's election manifesto.But a wide range of outcomes for fiscal policy are possible in the Budget on October 30.◼ We're now in the early stages of an interest rate cutting cycle, with the Bank of England's messaging consistent with 25bps rate cuts at every other meeting.While companies should benefit from rate cuts fairly quickly, for the household sector the lagged impact of past rate hikes will continue to dominate over the next eighteen months.After two years of stagnation, the UK economy enjoyed a strong recovery in H1 2024, with quarter-onquarter GDP growth of 0.7% in Q1 and 0.5% in Q2.What's more, the pickup was despite a relatively weak contribution from consumer spending -though it accounts for just over 60% of the economy, household consumption accounted for just two-fifths of the increase in GDP in H1 2024.On the plus side, we're optimistic that consumer spending will play a stronger role in the recovery moving forwards.But on the flip side, we think other categories will offer smaller contributions to growth.Stockbuilding has provided a sizeable boost but that should now wane, while recent fiscal policy changes will restrain real government consumption.With the lagged impact of past interest rate hikes also continuing to emerge, we think the economy is unlikely to sustain the well-above-trend pace seen in H1 2024.However, we think the consensus forecast -which implies that average quarterly growth across H2 2024 and 2025 will be roughly half the pace seen in H1 2024 -is a touch too gloomy (Chart 6). Chart 6: We expect GDP growth to slow, but not by as much as the consensusSources: Oxford Economics, Haver Analytics, HM Treasury ct nsensus ct
Source: Economic Outlook
Author: Andrew Goodwin
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4403783878