Improving outlook

EY upgrades UK growth as stagnation begins to fade

chart and business finance
Businesses should see investment conditions improving says EY

Britain should begin to pull out of its prolonged period of economic stagnation this year with inflation hitting the Bank of England’s target in May, says a key forecasting group.

Potential interest rate cuts and tax reductions create momentum for growth in 2024 and 2025, with business investment rising next year, according to the EY ITEM Club.

Its Winter Forecast, published today, sees GDP for 2024 upgraded from 0.7% in October’s Autumn Forecast to 0.9%, while the UK economy is now forecast to grow by 1.8% in 2025, up from 1.7% predicted in October.

Consumer Price Index (CPI) inflation is expected to fall to the Bank’s 2% target by May, while averaging 2.4% throughout 2024. This is lower than the 2.9% predicted in the Autumn Forecast, suggesting a more positive outlook for real household incomes.

The improved outlook for inflation should enable a more significant reduction in the Bank Rate in 2024. The EY ITEM Club is forecasting 125 basis points of cuts this year, up from the previous projection of 100 basis points in the Autumn Forecast. The EY ITEM Club continues to expect rate cuts to begin in May 2024.

Hywel Ball, EY UK chair, said: “The UK’s period of economic stagnation is slowly coming to an end. Households and businesses are still facing a tough outlook in 2024, due in part to the lagged effect of interest rate rises, but slowing inflation and anticipated Bank Rate cuts should help build economic momentum as the year progresses.

“Business investment, which has been disappointing for some time, is also expected to see a resurgence in the medium term. A modest contraction is forecast for 2024, but this should be followed by a revival in capital expenditure in subsequent years.

“Falling inflation and declining market interest rates, coupled with the potential for additional tax cuts in the Chancellor’s Spring Budget, suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth.”

House prices are expected to broadly flatline in 2024, in contrast to the 4% fall in prices predicted in the Autumn Forecast, with low unemployment levels and healthy household finances expected to support demand and limit the volumes of forced sales.

Martin Beck, chief economic adviser to the EY ITEM Club, said: “Although it remains possible that the UK may have slipped into a technical recession in Q4 2023, the mood music around the economy is justifiably improving.

“High inflation and expensive borrowing costs have been two of the biggest obstacles to growth recently and, with both showing encouraging signs of subsiding, prospects for late 2024 and beyond appear brighter.

“However, there are risks to the forecast. Ongoing geopolitical tensions could push up energy prices, which may slow the decline of inflation and increase costs for households and businesses.

“Plus, while the Bank of England is expected to reduce interest rates this year, the timing and extent of these cuts remain uncertain and continued high rates could prolong financial strain. The first half of 2024 should tell us a lot about the UK’s prospects of returning to growth over the medium to long term.”

Following the Autumn Forecast’s projected 0.5% decline, business investment is now expected to contract by nearly 1% in 2024. However, this is expected to give way to encouraging growth of 3.2% in 2025, followed by similar growth in 2026.

More firms in distress

A more negative report also published today says the number of businesses experiencing advanced or “critical” financial distress rose by 26% in the last quarter of 2023.

According to independent business rescue and recovery specialist Begbies Traynor’s Red Flag Alert, more than 2,240 businesses in Scotland are now facing severe distress, up by 9.1% on the same quarter in 2022.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said: “It is concerning to see early and advanced distress in Scotland and, indeed, across the whole of the UK, continuing to climb.

“With no respite from high interest rates and rising costs, both businesses and consumers are struggling.”

Only two sectors in Scotland saw critical distress fall since the previous quarter: travel and tourism.

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