Our economic outlook for the United Kingdom
August 19, 2024
Our outlook for year-end 2024
1.2%
Economic growth,
year over year
The U.K. exited recession in the first quarter, and growth continued in the second. GDP increased by 0.6% in the second quarter compared with the first, modestly below 0.7% first-quarter growth. We anticipate only a marginal impact on growth from the new Labour government, as it will be constrained by the same fiscal rules as the Conservative government was.
2.8%
Core inflation, year over year
The pace of headline inflation increased in July, rising to 2.2% year over year. But the uptick was largely attributable to base effects, specifically to energy prices having fallen by less than they did a year earlier. Other measures showed that the disinflation process continued. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, slowed to 3.3% year over year in July. We expect core inflation to end 2024 around 2.8% year over year and to hit the 2% target set by the Bank of England (BOE) by the second half of 2025.
4.75%
Monetary policy rate
In its 5-4 vote on August 1, the BOE cut the bank rate by 25 basis points to 5%. Dissenting Monetary Policy Committee members preferred to keep the rate at 5.25%, where it had stood for more than a year. The committee said policy would remain restrictive “until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.” We expect the BOE to next cut the bank rate at its November meeting, with the policy rate ending 2024 at 4.75%. We anticipate quarterly 25-basis-point cuts in 2025.
4–4.5%
Unemployment rate
The unemployment rate unexpectedly fell to 4.2% in the April–June period, from 4.4% in the March–May period. Although job vacancies continued a downward trend, employment increased, with 24,000 jobs created. We foresee the unemployment rate ending 2024 in a range of 4%–4.5%. Risks skew to the upside given recent signs of labor market softening.
What I’m watching
Sticky measures of underlying inflation
Three measures of underlying inflation have slowed in 2024 but remain elevated and inconsistent with the BOE’s 2% inflation target. A continued deceleration in all three will be necessary for the BOE to feel comfortable about cutting interest rates this year.
Shaan Raithatha,
Vanguard Senior Economist
Notes: CPI is the Consumer Prices Index. Core CPI excludes volatile food, energy, alcohol, and tobacco prices. Private sector wages as presented exclude bonuses.
Source: Vanguard calculations using data from the U.K. Office for National Statistics as of June 20, 2024.
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