UK economic growth forecasts downgraded for next two years – economists

The UK economy is set to grow slower than previously expected over the next two years amid cautious consumer spending, according to new forecasts by economists.

EY Item Club’s latest quarterly economic forecast also suggested that caution by Bank of England rate-setters not to cut interest rates too quickly will contribute to “steady rather than rapid” growth.

It represents a potential blow to Chancellor Rachel Reeves days ahead of the autumn Budget, with the Government hoping that future economic growth can help generate more funds to support spending plans.

Earlier this week, the International Monetary Fund (IMF) pointed towards 1.1% growth in the UK in an improved set of predictions.

The UK economy grew by 0.7% and 0.5% in the first two quarters of 2024, according to the Office for National Statistics.

However, it could witness slower growth in the latest quarter after no growth in July and a 0.2% rise in August, as spending was dented by continued pressure on household budgets and damp summer weather.

EY also downgraded its guidance for next year, predicting that growth will improve to 1.5% in 2025, down from a 2% forecast made in July.

It said the downgrades are largely linked to household savings, which are weaker than initially thought three months ago and causing consumers to restrict some spending habits.

“However, lower household savings has reduced the scope of potential consumer spending and sticky inflation means that interest rate cuts are set to occur at a gradual pace.

“This means that growth in 2025 won’t be as robust as it could have been.”

The forecast said it expects UK interest rates – which currently sit at 5% – to drop to 3.5% by the end of 2025.

Mr Swannell said cuts to interest rates should provide “a shot in the arm for the private sector and a pickup in business investment”.

As a result, it projected a 1.3% rise in UK business investment this year, up from a previous estimate of 1%.