Our economic outlook for the United Kingdom
October 17, 2024
Our outlook for year-end 2024
1%
Economic growth,
year over year
Revised data show that the U.K.’s GDP growth in the second quarter was not quite as strong as originally reported. GDP grew by 0.5% in the April-to-June period, less than an initial estimate of 0.6%. Monthly indicators showed no economic growth in July and 0.2% growth in August. We have lowered our 2024 growth forecast, to 1% from a previous forecast of 1.2%, amid expectations of moderating growth in the second half of the year.
2.8%
Core inflation, year over year
The pace of headline inflation slowed to 1.7% year over year in September, down from 2.2% year over year in August, according to Consumer Prices Index (CPI) data released October 16. The reading was a full five percentage points below its year-over-year level in September 2023, when it registered 6.7%. Lower prices for automotive fuels (down 10.4% month over month) and airfares drove the improvement. Prices for services declined in the month, down by 0.3%. Year over year, the pace of services inflation fell to 4.9% from 5.6% in August. The pace of core inflation also slowed, to 0.1% month over month (from 0.5%) and 3.2% year over year (from 3.6%). We expect core inflation to end 2024 around 2.8% year over year and to hit the BOE’s 2% target by the second half of 2025.
4.5%
Monetary policy rate
The Monetary Policy Committee of the Bank of England (BOE) appears more mindful of global conditions, and specifically of recent Fed and ECB dovishness. Given this perceived shift, we now expect a 25-basis-point rate cut in November to be followed by another quarter-point cut in December, which would leave the bank rate at 4.5% at year-end. We maintain our forecast for 100 basis points of rate cuts in 2025, but we now expect these cuts to be front-loaded. We foresee the bank rate at 3.75% at midyear and 3.5% at the end of 2025. On September 19, the BOE maintained the bank rate at 5%.
4–4.5%
Unemployment rate
Wage growth continued to cool in the June-to-August period, a normalization that would likely help to ease services inflation. Job vacancies fell, adding to evidence of an overall labor market softening. Annual growth in workers’ regular earnings dipped to 4.9% from 5.1% in the previous three-month rolling period, and was last lower in April–June 2022, when it stood at 4.7%. Job vacancies fell by 1.7% compared with May–July, to 856,000. The unemployment rate fell to 4% in June–August, from 4.1%. We foresee the unemployment rate ending 2024 in a range of 4%–4.5%, with risks skewed 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.
Notes: All investing is subject to risk, including the possible loss of the money you invest.
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