UK economic growth forecasts downgraded in blow for Chancellor ahead of Budget

Autumn forecast predicts that UK gross domestic product will increase by 0.9% in 2024. It had previously predicted in July that the UK would record 1.1% growth for the year

Cautious consumer spending is expected to dampen the UK's economic growth over the next two years, economists have revealed.

The EY Item Club’s latest quarterly economic forecast indicates that slow decision-making by Bank of England rate-setters not to slash interest rates too rapidly will result in "steady rather than rapid" growth. This news comes as a potential setback for Chancellor Rachel Reeves before the autumn Budget, especially since the Government counts on future economic expansion to generate funds for its spending ambitions.

The forecast this autumn predicts that UK gross domestic product (GDP) will rise by 0.9% in 2024, a downgrade from July's prediction of 1.1% growth. In contrast, earlier this week, the International Monetary Fund (IMF) improved its outlook, still expecting a 1.1% growth rate for the UK. Official data from the Office for National Statistics showed the economy grew by 0.7% and 0.5% in the first two quarters of 2024.

A prospective slowdown might be around the corner for the most recent quarter after stagnation in July and just a 0.2% increase in August, slowed by the squeeze on household incomes and lacklustre summer weather. On top of this, EY has also revised downwards its growth prediction for next year, forecasting an uptick to 1.5% in 2025, a step back from a previous 2% growth expectation made in July.

The report linked the downgrades primarily to weaker household savings than initially estimated three months ago, causing consumers to limit some spending habits. Matt Swannell, chief economic advisor to the EY Item Club, stated: "Following last year’s technical recession, a strong start to 2024 helped establish the UK’s recovery and a return to steady growth is forecast for next year."

He added: "However, lower household savings has reduced the scope of potential consumer spending and sticky inflation means that interest rate cuts are set to occur at a gradual pace. This means that growth in 2025 won’t be as robust as it could have been."

The forecast anticipates UK interest rates – currently at 5% – to drop to 3.5% by the end of 2025. Mr Swannell suggested that cuts to interest rates should provide "a shot in the arm for the private sector and a pickup in business investment". Consequently, it projected a 1.3% rise in UK business investment this year, up from a previous estimate of 1%.