Key Takeaways
- We expect the U.K. economy to continue its path of muted growth, close to stagnation, into 2024, as real interest rates become increasingly restrictive.
- Headline inflation remains high but we expect it to gradually fall back close to target in the second half of 2024. The BoE may have raised interest rates for the last time in this cycle, provided pay growth also eases soon.
- Real wage growth has turned positive. Together with a labor market that should remain firm by historical standards, this should mitigate an otherwise constrained growth environment.
Economic growth in the U.K. is set to remain muted well into 2024 under the lingering impact of high inflation and monetary policy rates that will turn increasingly restrictive in real terms as inflation abates. This fundamental view of the U.K. economy remains largely unchanged from our late June forecast.
Even so, we have revised our forecast for this year slightly upward, to 0.3% from zero, but downward for 2024 to 0.5% from 0.8% in our previous forecast, shifting some of the slowdown into next year. This is mainly due to some idiosyncrasy in the in the composition of growth in the second quarter of this year, which we expect to unwind over the next quarters. In particular, we think household consumption, which expanded strongly in Q2, will see a downward correction in the second half of this year, as the earlier one-off factors that were behind that expansion are no longer in play.
Headline inflation hardly eased in August and still stood at 6.7% (see chart 1). But it was the recent rise in global oil prices that prevented a greater drop, and this will not change the broader picture of gradually easing inflation. Indeed, although producer price inflation also saw a small uptick, it remains firmly in negative territory and, with the usual delay, should continue to support the downward trend in consumer price growth.
Some of the good news the Bank of England (BoE) had been waiting for materialized when both core and services inflation reduced markedly in August, although levels remain high. It was an important step in the right direction and the BoE did not raise rates further on Sept 21. Still, the bank will unlikely be put at ease until pay growth--still running at 7.8% in July--starts easing, too. It may still take a few months until the BoE feels more comfortable with a peak rate of 5.25%, before it could lower rates again from the second quarter in 2024.
Chart 1
In the meantime, the impact of tighter financing conditions is already being felt throughout the economy, but still has some way to go before it reaches its full effect. Higher mortgage costs are a case in point: As previously fixed-rate periods expire or are refinanced at significantly higher fixed rates, the mortgage burden will rise across the approximately 30% of U.K. households that have a mortgage. Households that rent their home are affected, too, as rental yields rise in line with the broader interest rate environment.
While the cost of borrowing, in real terms, becomes increasingly restrictive to growth (see chart 2), there are some mitigating factors. Real wage growth has just turned positive and will improve further in the coming months. And although weakening, the labor market should remain firm by historical standards.
Chart 2
Supported by forbearance measures, this should prevent widespread distressed selling of homes. Still, during the pandemic house-price boom, affordability--measured as the ratio of prices over household income--deteriorated to unsustainable levels, in our view, and is now due for a sustained downward correction (see “European Housing Markets: Sustained Correction Ahead,” published July 20, 2023, on RatingsDirect).
Although financial markets have remained relatively calm recently, this could change in the event of significant downward surprises at home or abroad relating, for example, to the labor market, the conflict in Ukraine, or the housing market. Already tight financing conditions could quickly become overly restrictive and depress economic performance materially more than we currently forecast. At the same time, household resilience could prove more robust, despite wage growth moderation, in which case we see an upside to our growth outlook for the U.K.
There are also both upside and downside risks to our forecast from a technical side. The Office for National Statistics will on Sept. 29 release significantly revised national accounts data. These are likely to change our forecast numbers, but are unlikely to affect our broader view of a U.K. economy that remains close to stagnation until mid-next year.
Table 1
| U.K. Economic Forecasts | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |||||||||
| GDP | 7.6 | 4.1 | 0.3 | 0.5 | 1.5 | 1.6 | ||||||||
| Household consumption | 6.2 | 5.6 | 0.4 | 0.4 | 1.7 | 1.8 | ||||||||
| Government consumption | 12.5 | 1.8 | 1.1 | 2.6 | 1.5 | 1.4 | ||||||||
| Fixed investment | 6.1 | 8.6 | 0.6 | -2.2 | 3.2 | 2.5 | ||||||||
| Exports | 2.2 | 9.9 | -3.3 | 2.8 | 3.6 | 3.1 | ||||||||
| Imports | 6.2 | 13.3 | -4.3 | 3.5 | 4.4 | 3.7 | ||||||||
| CPI inflation | 2.6 | 9.1 | 7.5 | 2.5 | 2.0 | 2.0 | ||||||||
| CPI inflation (Q4) | 4.9 | 10.7 | 4.5 | 2.3 | 2.0 | 2.0 | ||||||||
| Unemployment rate | 4.5 | 3.7 | 4.3 | 4.7 | 4.4 | 4.2 | ||||||||
| 10y government bond | 0.70 | 2.30 | 4.10 | 4.00 | 3.40 | 3.30 | ||||||||
| Bank rate (EOP) | 0.25 | 3.5 | 5.25 | 4.25 | 2.50 | 2.50 | ||||||||
| Exchange rate (USD per GBP) | 1.38 | 1.23 | 1.24 | 1.27 | 1.36 | 1.38 | ||||||||
| Source: ONS, BoE, S&P Global Market Intelligence, S&P Global Ratings (forecasts). | ||||||||||||||
This report does not constitute a rating action.
| Senior Economist: | Boris S Glass, London + 44 20 7176 8420; boris.glass@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.