CBI Economic Forecast - December 2024

UK ECONOMY TO GROW AT A STEADY YET UNIMPRESSIVE PACE AS BUDGET MEASURES WEIGH ON BUSINESS - CBI ECONOMIC FORECAST

The latest CBI Economic Forecast shows that, while the UK economy began to recover this year, growth over 2024 and 2025 is now expected to be slower than forecast in June. GDP growth will continue at a steady yet unimpressive pace through to 2026, primarily driven by household spending. The weaker outlook partly reflects the impact of measures in the Autumn Budget, as higher employment costs and the crowding out of private sector activity will weigh on growth over our forecast.

The CBI’s latest UK Economic Forecast shows that:

• UK GDP growth in 2024 is projected to be 0.9%, a marginal downgrade compared to our June forecast of 1.0%.
• UK GDP growth in 2025 is projected to be 1.6% over the year, a downgrade compared to our June forecast of 1.9%. We then expect GDP to grow by 1.5% in 2026.
• Consumer spending is expected to increase over 2025, but to a lesser extent compared to our June forecast due to slower real incomes growth.
• Business investment is projected to grow over our forecast but will be weighed down by higher employment costs and crowding out following the Budget.
• Productivity (output per worker) remains challenging and will lag slightly behind its lacklustre pre-pandemic trend through 2026.

Louise Hellem, CBI Chief Economist, said: 

“The government’s focus on stability is welcomed by businesses of all sizes as a vital pre-condition for growth. But with consumers and businesses continuing to feel the squeeze, there is work to be done to get momentum back into the economy.

“Measures in the Autumn Budget will increase firms’ costs at a time when their profit margins have already been under pressure. Many businesses have told us that these measures will likely push up prices and weigh on their hiring and investment plans going forward.

“Government can support business confidence by taking catalytic actions to increase business headroom for investment. Implementing a faster, more transformative timetable for business rates reform, immediate flexibility on the apprenticeship levy, measures to boost tech adoption, and delivering occupational health incentives for the workforce can help address the many challenges firms are facing.

“As set out in the CBI’s Blueprint for Competitiveness, a modern Industrial Strategy that draws upon the UK’s national assets by harnessing the potential of innovation, regulation, and skills across the everyday economy can drive the business investment that can unlock sustainable growth.”

The Economic Forecast in detail shows: 

Consumer spending remains modest as incomes growth slows

The steady pace of GDP growth will be primarily driven by household spending. However, consumption growth in 2025 is lower than in our June forecast and then eases slightly in 2026. This weaker outlook is due to slower growth in real incomes, as inflation remains above the Bank’s 2% target through 2026.

Business investment weighed down by Budget measures

Business investment growth is expected to pick up in 2025 (as GDP growth improves), but growth then slows slightly in 2026. Despite a firmer outlook, our forecast for the level of business investment in 2026 is around £6bn lower than what we would have provisionally expected before the Budget. This reflects the drags from higher employment costs and crowding out from government investment.

Inflation expected to remain above the Bank’s target through 2026

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 partly reflects the feedthrough of Budget measures to higher prices, particularly in sectors such as hospitality and retail.

Bank Rate projected to be reduced to 3.5% by 2026

Higher inflation will lead to a more gradual pace of interest rate cuts. The Monetary Policy Committee (MPC) is expected to reduce Bank Rate by 25 basis points each quarter, until reaching a terminal rate of 3.5% in the first quarter of 2026. This would leave monetary policy in a slightly restrictive stance, as the MPC looks to bring inflation down to target in the medium term.

Higher employment costs will weigh on firms’ hiring plans

The CBI’s surveys reported that hiring intentions worsened significantly in November following the Autumn Budget, and we expect that the announced measures will weigh on private sector employment over our forecast and a greater proportion of employment growth will come from the self-employed. The unemployment rate will remain low by historical standards, however. Wage growth is set to slow through 2026, reflecting a combination of higher employment costs, lacklustre productivity, a slight margin of labour market slack, and normalising inflation expectations.

Marginal potential impact from higher US trade tariffs

The forecast assumes that the UK avoids additional US tariffs that are placed by the incoming Trump administration on imports from China and the EU. Under a more extreme scenario where the US imposes universal 10% tariffs on UK goods, and the UK retaliates proportionally, the impact on UK GDP and inflation is still expected to be marginal.