The QEF, winner of the 2024 FocusEconomics award for best GDP forecast, expects the UK economy to grow by 1.1% for 2024, with the projection for 2025 remaining at 1.0%. The economy is expected to grow by 1.1% in 2026, a minor upward revision.
The overall growth landscape remains relatively weak, with government spending the main driver of GDP this year. Household consumption is expected to increase significantly in 2025 as the impact of lower inflation and interest rate cuts kick in.
CPI is expected to be slightly higher than previously forecast by the end of 2024, at 2.6% due to global trade uncertainties, pay growth, and rising energy costs. It is then expected to slow, closer to the Bank of England 2% target, reaching 2.2% in Q4 2025 and 2.1% in Q4 2026.
After a welcome recovery from last year’s short recession, the UK economy has performed better than expected in 2024. The ONS has estimated growth of 0.6% in Q2, and the BCC is now forecasting 0.4% for Q3. But this momentum is expected to tail off, with 0.2% in Q4, and for every quarter in 2025.
Business investment is expected to increase by 0.3% in 2024, a revision down from the previous forecast. Business investment is then expected to grow by 1.4% in 2025 and 2.0% in 2026.
The services sector is projected to be the highest growth sector in the economy, with yearly growth above 1% across the forecasting period.
The outlook for overseas trade is expected to remain weak due to ongoing trade barriers with the EU and wider trade tensions, with both imports and exports contracting in 2024 by -0.6% and -1.1%, respectively, before a gradual bounce back in 2025 and 2026. This is a slight upward revision on our last forecast.
Average earnings are expected to grow more slowly over the forecast period but continue to remain above inflation. Annual wage growth is expected to be 4.0% in Q4 2024, remaining at the same level in Q4 2025, before falling to 3.5% in Q4 2026.
The average unemployment rate is expected to be 4.3% in 2024, rising slightly next year to 4.4%, before easing to 4.1% in 2025. That is a slight decrease from last quarter’s forecast. However, youth unemployment will remain high, with the percentage out of work forecast to be 13.3% this year, 13.4% in 2025 and 13.1% in 2026.
Following the first interest rate cut for over four years in August, the BCC is now forecasting another cut during Q4, with the Bank of England base rate expected to be 4.9% by the end of 2024. The Bank is expected adopt a more cautious approach and make a series of 0.1pp cuts, bringing the interest rate to 4.3% by the end of 2025, and falling to 3.8% by the end of 2026.
“The BCC’s latest forecast shows that while the UK economy will perform better this year, it’s unlikely to be heading into the fast lane any time soon.
“Although domestic demand should be helped by a gradual reduction in interest rates and by rises in real wages as inflation stabilises, firms will still struggle to invest. This is due to continuing global economic and political uncertainty, alongside a downbeat Government assessment of its fiscal position and warnings of tough decisions in the budget.
“As we head towards the Chancellor’s first budget at the end of October, businesses will be wanting the government to focus on measures that boost investment, support growth and maintain competitiveness.”
“The UK economy has grown at a higher than expected rate in the first half of this year, following a short technical recession in 2023, and our and our upward GDP revision for 2024 reflects that.
“However, widespread uncertainty could weigh down on growth expectations for 2025 and 2026. Major global conflicts, trade tensions, and an impending US election could all feed into a climate of hesitation for firms, particularly those involved in global trade.
“Our recent business surveys have shown increasing confidence among SMEs, but the majority tell us they are still struggling to increase investment. Further cuts in interest rates will help. Next month’s Budget is a crucial opportunity for the Government to boost business growth and maintain competitiveness. Firms are also keen to see clear details of an industrial strategy that will drive economic growth.”
You can find more data on the Quarterly Economic Forecast here.
Read more latest news from the BCC here.
