Rising interest rates are set to slow the UK economy next year, casting a pall over the country in a likely election year.
The EY Item Club, the economic forecasting group, has halved its forecast for UK economic growth in 2024 to 0.8%, down from the 1.9% projected in April.
The 2025 GDP growth forecast has also been downgraded, from 2.3% to 1.7%.
These growth downgrades are due to the increase in UK interest rate over the last 20 months, from 0.1% in December 2021 to 5% today.
EY ITEM Club predict two further interest rate rises from the Bank of England, in August and September, meaning Bank Rate peaks at 5.5%.
That will further slow growth, and put more pressure on mortgage holders, with over one million households across Britain are expected to lose at least 20% of their disposable incomes to surging mortgage costs.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“The inflation and interest rate outlook is a key risk for the forecast. Should inflation prove more stubborn than expected, the prospect of even more rate rises than we expect will come very much into play. On the other hand, the potential is there for inflation to fall faster than expected, as June’s outturn demonstrated.
But the good news is that the economy remains on course to avoid recession, with the UK economy is expected to grow 0.4% in 2023, up from the 0.2% growth seen three months ago.
Beck explains:
“At the moment, the boost from less expensive energy in particular means the EY ITEM Club doesn’t believe recent interest rate rises will push the consumer sector or wider economy into recession. And although the current rate rising cycle doesn’t appear to be over yet, current market expectations for Bank Rate to climb to around 6% seem unlikely to come to pass.
That said, how the Bank of England perceives things will be key and, should it opt for a more hawkish stance, there is a real risk that interest rates could continue to ratchet up to a level where even the protection afforded by healthy household and business balance sheets isn’t enough to prevent a recession. On that count, the next few months – and what they tell us about just how sticky inflation and strong pay growth are – will be crucial.”
The path for economic growth could influence Rishi Sunak’s decision on when to call the next election, with senior Conservatives urging him to go to the polls in the spring.
This article was written by Graeme Wearden from The Guardian and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.