KPMG has significantly upgraded the United Kingdom’s GDP growth forecast for 2024 to 0.5%, a marked increase from its previous estimate of 0.3%, following a modest 0.1% growth in the prior year.
New insights from KPMG reveal that the UK economy is expected to grow at a rate of 0.5% this year, up from an earlier projection of 0.3%. This positive revision follows a small growth of 0.1% in the previous year. The consultancy also adjusted its 2024 growth forecast to 0.5%, reflecting a similar increase from the initial estimate of 0.3%. Growth is anticipated to reach 0.9% in 2025, supported by a series of anticipated interest rate reductions by the Bank of England as inflation begins to ease.
KPMG projects that the Bank of England’s base rate will potentially decrease to around 3% next year from the current 5.25%, a peak not seen in 16 years. According to KPMG, the economy is ‘turning a corner’ after significant challenges since the onset of the pandemic in 2020. Severe inflation, rising interest rates, and increased living costs driven by higher global energy prices, particularly after Russia’s invasion of Ukraine, have hindered economic expansion.
Yael Selfin, KPMG UK’s chief economist, noted that political uncertainty is likely to be resolved soon with a summer election and a potential fiscal event in the autumn, which will outline the new government’s economic agenda. Selfin mentioned that this could be facilitated by gradual interest rate cuts, which are likely even though inflation is expected to rise slightly above its target later in the year.
Evidence suggests that the incoming government will experience more stable economic conditions post-election. Inflation has reached the Bank of England’s 2% target for the first time since July 2021. Additionally, the Office for National Statistics has revised its estimate for first-quarter GDP growth to 0.7%, up from 0.6%. The Bank of England is expected to initiate interest rate cuts at its next meeting on 1 August. KPMG anticipates that a slowdown in price growth could lead to multiple base rate reductions over the next 18 months.
Nevertheless, KPMG cautioned that despite the positive growth forecasts, the next government will confront a challenging fiscal environment. The fiscal reality remains stringent, irrespective of the election outcome. Higher interest rates, persistent debt issues, and mounting spending pressures on health and defence sectors are expected to continue. Both major political parties have been criticised for neglecting the strain on public finances during the election campaign, with current fiscal plans indicating potential real-terms cuts of about £20 billion in unprotected government departments such as local government and the justice system.
Labour leader Keir Starmer and Prime Minister Rishi Sunak have ruled out increasing income tax, national insurance, and VAT, the government’s main revenue generators. Such commitments suggest that the next administration may need to increase borrowing, breach existing fiscal rules, or implement substantial public spending cuts. Starmer has committed to bringing stability to economic policy-making and reforming the planning system to spur economic growth, thereby generating more funds for the Treasury to support public services.
KPMG’s revised forecasts indicate cautious optimism for the UK economy, projecting modest growth and potential stability for the incoming government. However, significant fiscal challenges remain for policymakers in the aftermath of prolonged economic struggle.
