UK QUARTERLY ECONOMIC OUTLOOK | Q4 2024
A word from our economist
Sugar rush of government spending set to accelerate growth in 2025
The UK economy stalled in Q3, leading to a resurgence in worries about stagnation. However, we expect growth to pick up sharply in 2025. A sugar rush of government spending and investment over the next year will give a significant tailwind to the economy, which, combined with a revival in consumer spending as households begin to use their increased income rather than save it, should lead to a jump in growth.
But that same sugar rush of spending, along with some of the other measures announced in the budget, is likely to mean that inflation hovers between 2.5% and 3% next year. What’s more, stronger growth and higher inflation mean that interest rates are likely to come down only gradually next year. We now see interest rates being higher in the UK than in the eurozone or the US by the end of 2025.
Overall, we’re expecting economic growth of around 1% this year and almost 2% in 2025
Overall, we’re expecting economic growth of around 1% this year and almost 2% in 2025. That may not sound transformational, but it would represent a big improvement over the last four years. We then expect growth to slow back to 1.5%.
There are, however, three key risks to this relatively positive outlook. First, a worsening of geopolitical tensions in Russia or the Middle East could cause a much larger rebound in inflation. Second, businesses’ reactions to the large increase in costs from the budget are uncertain. Attempts to pass on costs could cause a larger rebound in inflation, while reductions in wages or employment could undermine growth in consumer spending. Third, tariffs imposed by the new Trump administration pose a small downside risk to growth. The bigger issue is that a stronger US dollar puts upward pressure on UK inflation.
The big picture though is that growth in 2025 should be the fastest since 2022.
