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UK growth to remain sluggish this year, 0,4% and improving in 2025, OECD report

UK growth to remain sluggish this year, 0,4% and improving in 2025, OECD report

The United Kingdom GDP growth is projected to remain sluggish at 0.4% in 2024 before improving to 1.0% in 2025, reflecting the waning drag from past monetary tightening, according to the latest report from OECD, Organization for Economic Cooperation and Development.

Monthly GDP grew by 0.1% in February after a 0.3% rebound in January, foreshadowing a moderate pick-up in the first quarter of 2024 following the shallow technical recession in the second half of 2023. Retail sales volumes show signs of stabilization after a three-year long decline, with a modest increase of 0.8% in March compared to the same month last year, while consumer confidence remains on an upward, albeit unsteady, trend from historically depressed levels. Mortgage lending has started to recover as mortgage rates have eased slightly in recent months, edging up towards pre-pandemic levels with over 60 000 new approvals for house purchase in February. Business sentiment is also improving, pointing to private sector expansion since November. Lending to businesses has nearly stabilized since January after contracting for 12 months in a row.

Lower wholesale, energy and imported food inflation have tamed headline price pressures, with annual consumer price inflation at 3.2% in March. The 12% cut in the Ofgem energy price cap in April 2024 will further lower inflation. The labor market is cooling, with the stock of vacancies in the three months to March about 30% lower than its recent peak and close to pre-pandemic levels. Yet, wage-driven underlying price pressures persist, with services price inflation at 6.0% in March. Annual nominal wage growth remains robust despite a marked slowdown since the summer of 2023, with an increase of 6.0% in the three months to February.

Monetary policy is assumed to start easing from the third quarter of 2024, with Bank Rate gradually lowered from its current peak of 5.25% to 3.75% by the end of 2025, as inflation continues converging towards target. The Bank of England is also expected to proceed with the unwinding of the stock of assets held for monetary policy purposes in the Asset Purchase Facility at an unchanged pace, with the GBP 100 billion target for gilt stock reduction over the 12-month period to September 2024 renewed for another year.

Fiscal policy will remain restrictive, with assumed consolidation of about 1.3% of potential GDP between 2023 and 2025, in line with the government’s self-imposed fiscal target of decreasing public debt within a five-year horizon. Tax receipts keep rising towards historic highs of about 37% of GDP, as the cumulated 4 percentage points cut in the rate of national insurance contributions since 2023 only partially offsets the ongoing fiscal drag from frozen personal income tax thresholds, and the permanent full-expensing investment allowance less than fully compensates the increase in the statutory corporate tax rate.

Robust real wage growth will support activity in the first half of 2024, attenuating the strongly negative carry-over from the output decline in the second half of 2023. Monetary easing will then sustain the pick-up in private expenditure, including a modest increase in household investment as mortgage volumes start recovering. However, sticky services price inflation and fiscal drag will continue to weigh on consumers’ purchasing power, soft external demand will constrain trade growth, and policy uncertainty will impede business investment. Unemployment is expected to continue rising, reaching 4.7% in 2025 as the labor market cools. The government deficit will improve from 4.6% of GDP in 2024 to 3.5% of GDP in 2025, owing to continued consolidation and despite the fiscal cost of the Asset Purchase Facility, but public debt is set to remain above 100% of GDP in 2025.

Stronger real wage growth will support a modest pick-up in private consumption. Headline inflation is expected to continue moderating towards target, 2%, as energy and food prices have eased substantially, but persistent services price pressures will keep core inflation elevated at 3.3% in 2024 and 2.5% in 2025. Unemployment will continue increasing and reach 4.7% in 2025 as the labor market cools, although the actual degree of slack remains uncertain.

The fiscal and monetary policy mix is adequately restrictive and should remain so until inflation returns durably to target. Fiscal policy should remain prudent and focus on productivity-enhancing public investment when the monetary stance normalizes. Reforming property taxation can help rebuild fiscal buffers and promote both efficiency and progressivity. Further advancing supply-side reforms while avoiding policy churn is essential to increase potential growth, especially by continuing to address economic inactivity and stagnant investment.