UK QUARTERLY ECONOMIC OUTLOOK | Q4 2024
Economic outlook
Temporary growth surge before stabilisation
Growth is likely to accelerate in 2025, driven by a combination of rising consumer spending and stronger government consumption as real incomes rise, interest rates fall and the measures announced in the budget kick in. However, this surge of growth is unlikely to last beyond 2025.
The overall economy stagnated in Q3. However, the parts of the economy that we really care about actually did pretty well last quarter. Consumer spending rose 0.5% quarter-on-quarter (q/q) after gaining 0.2% in Q2. Government spending rose by 0.6% q/q and business investment by 1.1% q/q. In an encouraging sign of business confidence, corporate investment rose 1.2% q/q, and 4.5% year-on-year (y/y), the strongest annual gain since Q1 2023.
Households have benefitted from a surge in real incomes over the last year, driven by strong real wage growth, previous tax cuts, and falling interest rates. Indeed, real household disposable incomes have risen by 3.3% over the last year. We expect this growth in real incomes to continue in 2025, albeit at a decreasing pace.
Real household disposable incomes have risen by 3.3% over the last year.
One reason for this is that the drag on incomes from interest costs will continue to decline. Fewer people are set to remortgage each quarter and the increase in interest rate costs they are facing is smaller. As a result, interest costs should be a smaller drag on consumer spending going forward.
Until recently though, households have largely chosen to save this increase in income rather than spend it. But consumer confidence bounced back a bit after the budget and now that savings stocks have largely been replenished, we expect future increases in incomes to feed more directly into higher spending. Therefore, we expect real consumer spending to rise at a solid pace of 0.8% this year and 1.6% in 2025. In addition, the budget means government spending is set to rise by almost 4% in 2025. That will provide a significant boost to the economy.
Overall, we’re expecting growth to rise to 1.8% in 2025 before dropping back to around 1.5% in 2026.
However, there are substantial risks. Geopolitical events in Russia or the Middle East could push up energy prices drastically, which would result in higher inflation, interest rates and a return to stagflation or even recession.
Events in the US also represent a risk. Until we have more information about the details of Trump’s new economic policies, we’re not making any firm changes, but there are some broad observations we can make.
Events in the US also represent a risk.
One is that a 10% tariff on UK exports to the US would probably reduce GDP by less than 0.1% and it’s possible that the impact could even be much less than this. About 22% of UK exports go to the US, but most of that is services exports, which could be exempted from tariffs.
The impact on inflation in the UK depends on retaliatory tariffs imposed by the UK on US imports, which we assume would be relatively minor, and the movement in the currency. Trump’s economic policies will probably lead to higher inflation and higher interest rates in the US, resulting in a stronger dollar. Assuming the pound fell by 5% against the dollar but was stable against all other currencies (because the dollar is rising against everything), then inflation would probably be about 0.3 percentage points (ppts) higher in 2026.
Finally, while growth should accelerate in 2025, it is likely to slow again in 2026 to around 1.5% as the sugar rush of stimulus from the budget runs out and the big increase in taxes in the budget starts to feed through into lower household income growth.
