While OE’s 2024 growth forecast remains unchanged, its 2025 projection has been downgraded. OE's 2024 GDP growth forecast remains at 1.1%, but the 2025 projection has been downgraded to 1.8% from 2%. This revision reflects concerns that tax hikes could dampen economic activity, while public sector inflation may rise due to above-inflation public sector pay awards. Tax rises and cost-saving measures are expected in the October Budget as the government grapples with the fiscal overshoot.
Economic Growth
The economy stagnated in June, following May’s 0.4% rise in monthly GDP growth. The slump was largely due to a sharp fall in retail sales and the impact of heath sector industrial action. However, early data suggests growth returned in July, driven by a retail sales recovery and lower strike activity. PMI business surveys, which gauge sentiment in the manufacturing and services sectors, also indicate a strong start to Q3. Despite June’s setback, the economy grew 0.6% in Q2, a little slower than Q1’s 0.7%.
Inflation
According to the ONS, the largest upward contribution to the monthly change in inflation came from housing & household services as prices of energy fell by less than they did last year. Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.3% in the 12 months to July, down from 3.5% in June.
Unemployment
According to the ONS’s Labour Force Survey, the employment rate increased in the latest quarter (to 74.5%) but remains below pre-pandemic levels (76.2% in the three months to February 2020). It remains the case that historically high numbers of people across all ages are reporting as long-term sick.
Earnings
From April to June, average total earnings grew by 4.5% and regular earnings (excluding bonuses) also by 5.4%. After inflation, total earnings rose by 1.6% in the three months to June.
Key Drivers of the Short-term Outlook
- Fiscal policy is tightening.
- The Bank Rate will end the year at 4.75%.
- The impact of tighter monetary policy will continue to emerge.
- Pay growth is likely to outpace inflation.
- The housing market is enjoying a soft landing.
What to Watch Out For
- Consumers spending their pandemic savings.
- Changes to fiscal approach.
- Rising corporate insolvencies.
Produced by the Foresight Factory for the IPA Commercial Group
