Household incomes to improve amid ‘turning point’ for economy in 2024 – report

Growth is expected to step up again in 2025, with an expected increase in gross domestic product (GDP) of 1.8% compared with the 1.7% previously predicted, according to EY’s latest economic forecast.

But its growth prediction for the overall GDP outcome in 2023 has worsened, with the group downgrading its prediction to expansion of just 0.3%, having previously forecast GDP to rise by 0.6%.

It comes amid fears that the UK may have entered a technical recession in the final quarter of 2023 – as defined by two or more quarters in a row of negative output – after a contraction in the third quarter and poor recent economic indicators for the closing months of last year.

However, household incomes are expected to improve as Consumer Prices Index (CPI) inflation is predicted to fall to the Bank of England’s 2% by May, the EY Item Club said.

The inflation rate is expected to average around 2.4% throughout 2024, which is lower than the previously predicted 2.8% by the economic forecaster in its autumn forecast.

This positive forecast for inflation is anticipated to lead to a “significant” reduction in the bank rate for 2024.

It is now predicting rates to fall from 5.25% currently to 4% over the year ahead, with the first cut coming as soon as May.

These rate cuts are expected to lead to a decrease in borrowing costs, which is likely to boost spending, as people will have more disposable income, according to the group.

Hywel Ball, EY’s UK chairman, said: “While challenges remain, the forecast suggests that the UK’s period of economic stagnation is slowly coming to an end.

“Households and businesses are still facing a tough outlook in 2024, due in part to the lagged effect of interest rate rises, but slowing inflation and anticipated bank rate cuts should help build economic momentum as the year progresses.

“Business investment, which has been disappointing for some time, is also expected to see a resurgence in the medium term.

“A modest contraction is forecast for 2024, but this should be followed by a revival in capital expenditure in subsequent years.

“Falling inflation and declining market interest rates, coupled with the potential for additional tax cuts in the Chancellor’s spring Budget, suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth.”

House prices are expected to “broadly flatline” this year, according to the EY Item Club, instead of declining by 4%, as predicted in its autumn forecast.

The report suggests that low unemployment levels and healthy household finances will continue to support home buyer demand and limit the number of forced sales.

The report predicts that the unemployment rate will not rise significantly, as economic sentiment is expected to improve and the labour market remains flexible.

But last year’s interest rate increases will likely create financial difficulties and could result in some home repossessions.

This year, an additional 1.5 million households on fixed-rate mortgage deals will roll onto more expensive rates, which may affect GDP growth.

As household incomes “comfortably” outpace inflation and lower energy costs ease the cost-of-living pressures, consumer spending growth is expected to rise to 0.9%, an increase from the 0.7% previously projected.

Martin Beck, chief economic adviser to the EY Item Club, said: “Although it remains possible that the UK may have slipped into a technical recession in the fourth quarter of 2023, the mood music around the economy is justifiably improving.

“However, there are risks to the forecast. Ongoing geopolitical tensions could push up energy prices, which may slow the decline of inflation and increase costs for households and businesses.

“Plus, while the Bank of England is expected to reduce interest rates this year, the timing and extent of these cuts remain uncertain and continued high rates could prolong financial strain.”