A word from our economist
Consumer spending to drive growth in H2
The UK economy has gone from being too hot, with soaring inflation devastating living standards, to being so cold that it fell into a recession at the end of last year. But with inflation now back at around 2% and the economy finally growing at a decent pace, are the economic conditions just right for a period of expansion?
Describing two quarters of solid growth after a recession as a “Goldilocks” period is probably taking the analogy a bit far (it’s also worth remembering that in the original story the bears throw Goldilocks into the fire). But conditions look conducive to positive economic growth over the next 18 months. Admittedly, inflation will creep back up over the rest of this year, but not by much. Real incomes will continue to rise, which combined with growing consumer confidence, should lead to a revival in consumer spending. What’s more, political stability, falling interest rates and growing demand are boosting business confidence, which should lead to stronger business investment.
Falling interest rates and growing demand is boosting business confidence
Overall, we’re expecting economic growth of a little over 1% this year and almost 1.5% in 2025. That may not sound transformational, but it would represent a big improvement over the last four years.
One potential risk is the new Labour government’s first budget in October. We already expected fiscal policy to be less of a tailwind to the economy over the next year, but a tough budget with spending cuts and tax rises would risk turning fiscal policy into an economic headwind. However, that might offer the Bank of England (BoE) more room to cut interest rates without stoking inflation.