The British Chambers of Commerce (BCC) Quarterly Economic Forecast has slightly upgraded growth expectations for 2024 and 2025, as the recession lasts just two quarters, but strong growth will remain elusive.
The UK economy is expected to grow every year until the end of 2026 but will continue to lack momentum. While 2023 ended with a technical recession confirmed for Q3 and Q4, growth for 2024 and 2025 has been revised upwards slightly to 0.5% and 0.7% respectively, with 2026 set to grow at 1.0%.
But the overall growth profile remains low, with a weak rebound in consumer spending as the main driver for any increase in GDP, and interest rates reducing only slowly.
While the CPI rate of inflation has eased faster than expected, core inflation remains higher. Nevertheless, the overall downward trend should continue with CPI at 2.3% in Q4 2024, 2.1% in Q4 2025 and 2.2% in 2026, but remaining slightly above the Bank of England’s 2% target.
With growth in Q3 of 2023 being revised down into negative territory by the Office for National Statistics, and Q4 also showing a contraction, overall growth for that year now sits at 0.1%.
Despite 2024 beginning at a lower level than previously expected, sufficient growth should occur in the year to recover to levels comparable to the last BCC forecast. Overall, the expectations for 2024 and 2025 are both up, by 0.1 percentage points, to 0.5% and 0.7%, respectively.
But with global headwinds remaining, interest rates falling slowly and only gradual expansion in consumer spending, the BCC expects economic growth to remain subdued – finally hitting 1.0% in 2026.
But the recovery remains fragile as consumer and business confidence are muted – although disposable incomes are now above pre-pandemic levels, households are still spending less than they did in 2019.
Other dampening factors include historically higher interest rates weighing heavily on investment in house building and home improvements, and government expenditure declining for the next three years.
Subdued global demand, further trade barriers with the EU, and conflicts in the Middle East and Europe mean trade is also likely to continue to suffer. Exports are set to fall in 2024 by 1.3% before rising by 1.1% and 1.7% in 2025 and 2026. Imports are expected to be more lacklustre as a relatively weak UK economy restricts growth.
With inflation and interest rates both falling, the BCC still expects business investment to increase across the three years of the forecast, but the other factors mean the changes will be limited. There will be a rise of 1.0% in 2024, 0.8% in 2025 and 1.5% in 2026.
Average earnings are expected to continue to grow more strongly than inflation across the forecast period, with annual growth of 3.0% to Q4 2024, followed by 4.0% to Q4 2025 and 4.5% at the end of 2026.
With core inflation proving stubborn, wages continuing to rise, and geopolitical uncertainty persisting, the Bank of England interest rate is expected to fall only slowly. The BCC now forecasts a base rate of 4.5% at the end of Q4 2024, then 3.5% for Q4 2025, with no further change by Q4 2026.
The unemployment rate is expected to rise slightly to 4.2% in 2024 and then 4.4% in 2025, a slight downgrade from last quarter’s forecast. However, the labour market is set to remain tight as difficulty finding skilled staff and long-term sickness impact the available workforce. BCC research shows most firms seeking to recruit continue to report skills shortages.
“The BCC’s latest forecast shows the economy is still searching for the way out of its current malaise. While it’s welcome that GDP looks set to grow, the lack of momentum indicates some fragility.
“Pro-growth measures from the Autumn Statement may take time to have an impact and business and consumer confidence are rebuilding from a low base.
“With interest rates falling only slowly and minimum wages rising in April as pay, in general, outstrips inflation, businesses are unlikely to fully turn on the taps to fresh investment.
“With a general election on the horizon, politicians will need to demonstrate to firms that they have a sustainable long term economic plan that plays to the UK’s strengths and gives companies confidence.
“But unless the base interest rate starts to fall more sharply the economy is likely to remain close to stagnation.”
“With the current forecast expecting less than 1% growth over the next two years, it’s not obvious where large-scale economic growth in the UK will come from.
“Our research is clear about the issues UK SMEs face – skills shortages, high inflation that eats at margins, high interest rates that make borrowing harder, and trade barriers with the European Union, which all hit investment.
“Some sectors, such as retailers and hospitality, have been facing recession-like conditions since the onset of Covid lockdowns in 2020.
“Boosting long-term investment through a clear plan for the UK economy is key. The upcoming Budget will need to focus on reform of business rates, a more effective planning system, improving access to skills, and reviewing the current £85k VAT registration threshold to ensure this is not a barrier to growth.”
