UK economic forecast: December 2024

UK economy set to see a steady, but unimpressive, pace of growth

The UK economy began to recover in 2024, following a weak 2023. GDP grew at an above-trend rate over the first half of this year but then eased down a gear in Q3. We project that the UK economy will grow by 0.9% over 2024 as a whole, a marginal downgrade compared to our June forecast (of 1.0%).

We continue to expect that economic activity will pick up steam over 2025; however, we now expect growth to be somewhat slower than previously forecast. Specifically, GDP is projected to increase by 1.6% over the year, which marks a downgrade from June’s forecast (of 1.9%). The UK economy then maintains a steady, but unimpressive, pace of growth in 2026, at 1.5%.

The measures announced in the Autumn Budget have resulted in changes to the composition of growth over our forecast. Government spending and investment are expected to expand to a greater extent than previously expected, while higher employment costs and the crowding out of private sector activity will weigh on household spending and business investment.

Growth in consumer spending has been relatively restrained over much of 2024, partly reflecting cautious behaviour following recent economic shocks. We still expect households to increase spending over 2025, but to a lesser extent than in June. This is due to real incomes growth being dragged back by higher inflation, following the net fiscal loosening in the Autumn Budget. Consumption growth then slows slightly over 2026, as incomes growth eases further.

Business investment is now expected to have grown over 2024, primarily reflecting historical data revisions. We expect capex growth to pick up in 2025 (as GDP growth improves), but it then eases slightly in 2026. Despite a firmer outlook, our forecast for investment is weaker than what we would have expected before the Budget, reflecting the drags from higher employment costs and crowding out from government investment.

We project that productivity (output per worker) will lag slightly behind its lacklustre pre-pandemic trend through 2026. This weak outlook underlines the need to turbocharge growth and improve the UK economy’s competitiveness.

Higher inflation means we now expect more gradual Bank Rate cuts

CPI inflation eased noticeably over 2024, returning to the Bank’s 2% target in the early summer. The fall was driven by lower energy, transport, and food price inflation as the impact from recent global commodity shocks faded. However, domestic price pressures have remained somewhat stickier.

Inflation is expected to pick up in Q4 2024 and remain somewhat above the Bank of England’s 2% target over our forecast period (2.6% in 2025 and 2.5% in 2026). Our upgraded projection primarily reflects the feedthrough of Budget measures to higher prices, particularly in sectors such as hospitality and retail. Fuel prices remain a key upside risk to the outlook for inflation due to ongoing tensions in the Middle East.

Higher inflation over our forecast means that we now expect a more gradual pace of interest rate cuts. We anticipate that the Monetary Policy Committee (MPC) will reduce Bank Rate by 25 basis points each quarter, until reaching a terminal rate of 3.5% in Q1 2026. This would leave monetary policy in a slightly restrictive stance, as the MPC looks to bring inflation down to the 2% target in the medium-term. Alternatively, we could see a scenario where firmer inflation post-Budget, in addition to structural changes in price and wage pressures, leads to Bank Rate being reduced at an even more gradual pace.

Household spending to remain modest as real incomes growth slows

Increased interest rates and the lingering impact of high inflation prompted many consumers to hold back on spending in 2024, despite gains in real incomes. Research from the Bank of England suggests that this partly reflects households having “smoothed” through changes in their incomes and spending to maintain a broadly similar standard of living over the past few years. As a result, there’s been a rise in the household savings ratio over 2023 and 2024, which has been driven by non-pension savings.

Our forecast assumes that Autumn Budget measures will weigh on household spending, due to weaker incomes growth. This reflects our expectation that these measures will result in slower wage growth, higher inflation, and weaker employment growth. Therefore, while consumption growth is expected to pick up in 2025, it remains relatively modest and gradually slows through 2026.

Lower interest rates mean that the drag on spending from higher mortgage rates will ease somewhat over our forecast. While increased rates are expected to still gradually feed through to those mortgage holders that took out a mortgage in 2021, this will be partially offset by a growing number of households that will be able to refinance at a lower rate in the coming years. However, mortgage rates are unlikely to return to pre-pandemic levels over our forecast period.

Business investment will be weighed down by Budget measures

Official data on business investment were revised significantly following the ONS’ 2024 “Blue Book” release. These changes suggest that business investment has seen a weaker recovery from the pandemic than previously estimated, but also that it has grown at a quicker pace in 2024. These data revisions are the primary reason why our business investment forecast has been upgraded in 2024 and 2025.

CBI surveys suggest that private sector investment intentions have worsened recently following the Autumn Budget. Alongside anecdotes from our member companies, this suggests that higher employment costs (following the Autumn Budget) will likely weigh on investment plans going forward, particularly given the ongoing squeeze in profit margins.

Business investment is projected to expand moderately over 2025 and 2026. Tailwinds from consistent GDP growth and lower interest rates are expected to offset drags from higher employment costs and “crowding out” effects from higher government investment. It’s worth noting, however, that our projected level of business investment in 2026 is estimated to be roughly 2% lower than we would have provisionally expected before the Budget.

Trump presidency poses modest risk to UK under extreme scenario

Our baseline forecast assumes a “limited” Trump presidency, in which the UK avoids additional US tariffs that are placed on imports from China and the EU. As such, the UK sees a slight tailwind from stronger US demand in 2026. Under a more extreme scenario where the US imposes universal 10% tariffs on UK goods, and the UK retaliates proportionally, we would still only expect a marginal impact on UK GDP and inflation. This reflects the fact that the majority of the UK’s exports to the US are in services. However, some UK-based sectors that are more exposed to US goods trade, such as pharmaceuticals, would see a more noticeable negative impact in this scenario.

More broadly, our latest baseline forecast expects UK trade to continue to underperform its G7 peers. Net trade is projected to drag on growth over the forecast period, as imports increase at a faster pace than exports.

Public finances outlook improves following changes in fiscal rules

The near-term outlook for the public finances has changed moderately from our June forecast. This is mostly due to the policies announced in the Autumn Budget, which included changes in the fiscal rules. Notably, the government now intends to target public sector net financial liabilities (PSNFL) as the main balance sheet aggregate in its fiscal rules, replacing public sector net debt (PSND).

Public sector net borrowing is still set to fall over our forecast (to £91bn in 2026/27). However, the level of borrowing is expected to be £41bn higher than previously projected due to higher government expenditure and investment. As a share of GDP, net borrowing is set to fall from 4.5% in 2024/25 to 2.9% in 2026/27.

We expect the net debt to GDP ratio to peak at 96.8% in 2024/25, before falling to 96.3% in 2025/26. Net financial debt, on the other hand, is expected to rise from 82.2% to 83.3%. This divergence reflects our expectation that PSNFL will rise in the short-term due to higher costs associated with pension liabilities and social welfare programs.