Economic growth so far in 2024 has been better than expected, while inflation has fallen back to the Bank of England’s 2% target.
In our first monthly economic update of this Parliament, we look at the improving short-term UK economic outlook, recent developments in inflation and policy announcements from the new government.
UK growth picks up in first half of 2024
The UK economy grew by 0.7% in the first quarter (Q1) of 2024 compared with the previous quarter. Monthly GDP data for April and May suggests a similar rate of growth can be expected in Q2 2024.
This marks the strongest period of GDP growth since the immediate recovery from the pandemic in 2021 and early 2022. It also follows two successive quarters of falling GDP – sometimes defined as a ‘technical recession’ – in Q3 and Q4 2023.
Economic indicators over recent months have also generally been optimistic. For example, the purchasing managers index (PMI), a closely-watched survey of business activity, has been positive in June and July, with a noticeable increase in new business reported (PDF).
Other surveys of market sentiment, such as Deloitte’s survey of senior financial directors at large UK-based companies, have also largely shown rising business confidence.
In addition, consumer confidence in July 2024 increased to its highest level since September 2021 in a long-standing survey conducted by GfK, a market research firm.
Forecasts for GDP growth have been raised
The improved performance has led to economists revising their 2024 GDP growth forecasts higher.
A monthly survey of economists conducted by the Treasury shows the average forecast for GDP growth over 2024 has gone up from 0.4% in January 2024 to 0.9% in July 2024, as shown in the chart below.
Although the short-term outlook for the UK economy has improved, longer-term challenges remain. These are explored in the Library’s Research in brief article, Low growth: The economy’s biggest challenge, written for the start of the new Parliament.
Inflation back to the 2% target
The outlook for GDP growth has been boosted by falling inflation, which has supported household finances and spending.
The UK inflation rate, the change in consumer prices over the past 12 months, was 2.0% in May and June 2024. Inflation had previously been above the Bank of England’s target of 2.0% since August 2021, peaking at a 41-year high of 11.1% in October 2022.
As inflation has fallen, average wages adjusted for inflation have increased: annual wage growth was the highest since summer 2021 in the three months to May 2024.
Inflation is expected to rise a little over the rest of 2024, as previous falls in the annual comparison of energy prices “drop out” of the inflation calculations (which only cover 12 months).
Measures of underlying inflation remain higher
While overall inflation has declined to 2%, measures of underlying inflation remain higher. For example, ‘core inflation’, which excludes food and energy prices, was 3.5% in June 2024.
The Bank of England also keeps a close eye on prices of services when they set interest rates, as these prices are seen as less exposed to global factors and more dependent on domestic costs (such as wages) than the prices of goods.
The annual inflation rate in services has fallen, but not by as much as overall inflation – it was 5.7% in June 2024, as shown in the chart below.
The persistence of inflation in services has been one factor in the Bank of England’s Monetary Policy Committee (MPC) refraining from cutting interest rates (at the time of writing). They remain at 5.25% despite overall inflation returning to the 2% target.
Financial markets, as of 30 July, expect two quarter-point cuts in interest rates by the end of 2024, taking rates from 5.25% to 4.75%.
The results of the MPC’s next policy meeting will be announced on 1 August.
New government announces Budget date
On 29 July, the new Chancellor Rachel Reeves gave a statement to the House of Commons about public spending. Citing cost pressures that are likely to result in spending being higher than existing budgets, the Chancellor made some changes to spending commitments for this year and next. This included greatly reducing the number of pensioners eligible for Winter Fuel Payment and instructing departments to find savings totalling around £3 billion this year.
The Chancellor announced that there will be a Budget on 30 October 2024, where detailed tax and spending policies will be presented. The Office for Budget Responsibility, the UK’s public finances watchdog, will also publish a new set of forecasts for the economy and public finances at the same time.
The Chancellor said that the Budget will include departmental budgets for 2025/26. A full multi-year spending review was also launched, reporting in spring 2025, which will set spending plans for each government department.
About the author: Daniel Harari is a researcher at the House of Commons Library, specialising in the UK and international economies.
Picture credit: Matt Clayton on the Bank of England Flickr, CC BY-ND 2.0