The UK Economy is picking up steam, but more needs to be done to achieve sustainable growth - CBI Economic Forecast

With the General Election a matter of weeks away, the focus is firmly on the UK economy. The latest CBI economic forecast points to encouraging signs that it is on track to gradually pick up steam over 2024 and 2025. After a strong start to the year, momentum will continue with GDP growth in 2025 anticipated to reach 1.9%.

The economy has struggled in recent years under the pressures of economic shocks such as the COVID-19 pandemic and Ukraine war. GDP growth came in at only 0.1% over 2023, with the dual headwinds of high inflation and increased interest rates weighing on economic activity.

The CBI's latest UK Economic Forecast shows that:

• UK GDP growth is projected to rise to 1.0% in 2024.
• Momentum should continue in 2025, with GDP growth anticipated to reach 1.9% - broadly in line with the average pre-COVID growth rate (of 2.0% between 2010-19).
• Consumer spending is the main driver of growth, reflecting an improvement in households' real incomes as inflation falls.
• Business investment is set to be weak in 2024 but will recover as GDP growth strengthens.
• However, productivity remains below its pre-COVID trend, signalling further action is needed to spur longer-term, sustainable growth.

Louise Hellem, CBI Chief Economist, said:

"It's encouraging to see that the outlook for the UK economy is improving after a difficult 2023. However, we cannot afford to be complacent about our progress going forward. To ensure longer-term, sustainable growth, we must tackle our ongoing productivity problem.

"Our Business Manifesto sets out several policies to improve productivity and deliver prosperity through a positive vision for the UK economy. These include a cutting-edge trade and investment strategy, a Net Zero Investment Plan, and more support for firms to invest in AI - particularly where it can help in automation and super-charging productivity.

"Now in the midst of a General Election, political parties have an opportunity to prioritise the economy and unlock long-term, sustainable growth by using their manifestos to set out measures that will support business investment and propel growth for the next decade and beyond."

The Economic Forecast in detail shows:

Consumer spending is set to drive UK growth

Consumer spending is projected to be the main driver of the acceleration in GDP growth over our forecast, rising by 0.8% in 2024 and 2.5% in 2025. This mostly reflects improvements in households' real incomes, due to falling inflation and firm wage growth. Nevertheless, households will feel the pinch this year from the cumulative increase in the level of prices over the last three years, in addition to still-relatively higher lending rates.

Business investment sees a recovery in 2025

Business investment is set to be weak in 2024, declining by 0.2% over the year. This reflects the lagged impact of stagnant GDP growth over the last year. Our surveys also suggest a drag from high interest rates. However, a recovery in business investment is on the horizon (1.8% growth in 2025), as activity strengthens.

Inflation expected to settle at the Bank's 2% target next year

Inflation is projected to decline to the Bank of England's 2% target in the second quarter of 2024 but will pick up slightly in the latter part of this year (due to base effects from price rises this time last year). In 2025, inflation is expected to return to 2% more sustainably, partly reflecting a moderation in domestic price pressures.

Bank Rate projected to fall to a terminal rate of 3.5% in 2025

Signs of easing inflationary persistence mean that we expect the Bank of England to cut interest rates over our forecast, with the first reduction likely to occur in August. We then expect the Bank Rate to gradually fall to a terminal rate of 3.5% in the second quarter of 2025.

Fiscal headroom limited

Our forecast for stronger GDP growth means that the public finances outlook has improved, but the next government will still face a difficult fiscal inheritance. We expect the debt-to-GDP ratio to peak at 98.3% in the 2024/25 fiscal year, before declining somewhat to 94.8% in 2025/26.

Productivity outlook remains challenging

Despite the pick-up in GDP growth, productivity (measured as output per worker) remains around 1.5% below its pre-COVID trend at the end of our forecast period. This highlights that there clearly is more to be done to boost the UK's potential for growth over the long-term.