A Pre-Election Gloom

Main points

• We do not expect a rate cut until August. We now anticipate only two rate cuts by the end of 2024, leaving Bank Rate at 4.75 per cent. This path reflects a cautious unwinding of monetary policy given the upside risks posed by persistent core inflation, elevated wage growth and geopolitical challenges.
• While there are encouraging signs of some GDP growth, trend growth remains anaemic. We forecast GDP growth of 0.4 per cent in the first quarter of 2024 and 0.8 per cent in 2024 relative to 2023. However, geopolitical risks from the conflict in the Middle East present substantial downside risk and our view remains that the trend growth rate of UK GDP is only 1 per cent.
• The UK government will not meet its (arbitrary) fiscal rules. Given tax cuts in the recent budget and our forecast for lower trend growth than projected by the Office for Budget Responsibility, we now project that the government does not meet its fiscal targets based on its current spending plans. Not only are these rules are not being met, but they are also inadvertently constraining the public investment needed to improve economic growth.
• Inactivity is still on the rise, crimping the supply side of the economy. Rising inactivity rates along with the upward ONS revision in inactivity due to long-term sickness now takes the total number of inactive people to just under ten million.

See our previous UK Economic Outlooks to follow the analysis