The UK economy: a slow climb out of recession

The current situation in the UK

The UK ended 2023 in a recession, but is slowly emerging from its state of stagnation. According to the Organisation for Economic Co-operation and Development (OECD) the UK economy will see the slowest growth of the largest developed nations next year, with GDP predicted to rise by 1% in 2025 – below the rest of the G7 nations. Meanwhile, in May 2024 the Bank of England announced that it had left interest rates unchanged at 5.25% for the sixth time in a row, contrary to many experts’ predictions that interest rates would be cut.

The labour market remains a concern, with the unemployment rate standing at 4.3% in the first quarter of 2024. 9.38 million people aged 16-64 were economically inactive, and the inactivity rate was 22.1%. The British Chambers of Commerce expects unemployment to rise to 4.4% in 2025. While average wages have increased, the vacancy rate has dropped and redundancies have increased. A recent KPMG report suggests that employers are hesitant to commit to new hires due to uncertainty about the economic outlook.
 

Ways out of recession: prospects for recovery?

Although recovery may be slow, things are gradually moving in the right direction. Let’s take a look at some of the factors which could contribute to an improvement in the UK economy, as well as those which could impede growth.
 

Inflation

While inflation has slowed from the 40-year high it reached in 2022, both KPMG and the National Institute for Economic and Social Research (NIESR) anticipate that interest rates will fall later in the year. The Bank of England’s Monetary Policy Committee (MPC) has announced that it expects inflation to return to near its 2% target in the short term, but to increase slightly to around 2.5% in the second half of 2024.
 

The labour market

Due to population trends and a lower economic activity rate, the supply of labour is likely to remain relatively low. However, in the three months leading up to March 2024, average wages increased in both real and nominal terms, and nominal pay growth is expected to be well above inflation. According to the CIPD’s Labour Market Outlook for spring 2024, over 55% of employers plan to maintain their current staffing levels. Pay awards are predicted to be 4% in the private sector and 3% in the public sector.
 

The housing market

According to a Reuters poll, house prices in the UK are expected to remain steady this year before rising by 3% in 2025 and 4% in 2026. With fewer houses being built and the average house price currently around eleven times the average salary, home ownership is still out of reach for many. If interest rates are cut in August, as many commentators predict, the corresponding lower mortgage rates combined with wage increases could improve purchasing affordability – although this is still speculative.
 

Consumer spending

Consumer spending is forecast to grow by 2.2% in 2025, with the anticipated fall in interest rates likely to prompt households to borrow more. While disposable income is expected to rise by 2.8%, housing costs could offset this, leaving both low-income and middle-income households on a tight budget. But a recent EY report takes a more optimistic view, suggesting that falling inflation and interest rates, alongside tax cuts, should help unlock growth in consumer spending, house prices and real incomes, with 2025 ushering in a brighter economic future.
 

The General Election: what can we expect?

Although a date is yet to be set, we can be sure of a general election in the second half of 2024. Post-election, the new Chancellor will face some difficult choices. Given the relatively weak prospect for GDP growth, some recent tax cuts may have to be reversed. Ongoing geopolitical conflicts could also increase energy prices, meaning that inflation may remain high, with a knock-on effect on interest rates, GDP expectations and household spending power.
Long-term forecasting is challenging in an election year. Both major parties promise to deliver economic stability, but there are doubts around how this will be achieved. The opposition Labour Party aims to “stick to tough fiscal rules with economic stability at their heart,” with plans including introducing a new fiscal lock. Meanwhile, the Conservatives are hoping to retain power by focusing on reducing inflation, boosting growth and bringing down the national debt, all of which will likely involve spending constraints.