UK economic forecast: December 2023

UK outlook: shifting headwinds

Our latest economic forecast shows that the UK is set for another year of weak growth over 2024. This largely reflects continued, but shifting, headwinds facing businesses and consumers. While we expect inflation to fall back further, household spending will be constrained by the impact of higher interest rates feeding through, and a modest loosening in the labour market. Weak growth also weighs on business and housing investment, further dragging on activity. While we expect some recovery over 2025, it should be noted that GDP growth remains below its average in pre-pandemic years. And the continued underperformance of UK productivity highlights the need to maintain focus on boosting the economy’s longer-term growth prospects.

What does this forecast mean for business?

There are two narratives around the UK economy at present. The first is one of resilience: it is encouraging that the UK has avoided a recession in the face of strong headwinds over the last couple of years. The second one is of weakness: in underlying terms, the economy has barely seen any growth over this period. We expect these dual themes to persist in the year ahead – our forecast is for the economy to continue growing but at a weak pace, as new headwinds come to the fore. A notable theme in the data at present, and in our forecast, is that higher interest rates are starting to make their presence felt for households and businesses. Given that we don’t expect any further change to Bank rate, companies should plan for tighter financial conditions being here to stay.

However, there are some positives: the government’s full expensing for capital expenditure is a real boon for business investment, and the economy’s long-run prospects. Global economic growth holds up in our forecast, which should provide a benign backdrop for UK activity. But there are numerous risks around this scenario - most notably, developments in geopolitics could have a bigger impact on global activity, financial and commodity markets. Closer to home, lower inflation isn’t a done deal: domestic price pressures are still stubbornly high, which could temper the path of inflation back down.

Furthermore, while we expect UK growth to pick up in 2025, this does little to budge the underlying trend of stagnant productivity and living standards. Building on the progress from making full expensing permanent, more decisive action is needed to really shift the dial on the UK’s potential growth.