At the start of 2023, the market consensus was that gross domestic product (GDP) would fall by 1 per cent. But economists are now forecasting growth of 0.5 per cent in the UK economy – in line with KPMG’s forecast.
The accountancy firm reported that on a year-to-date basis, business investment grew by 6.3 per cent in Q3 2023. Household consumption – which is describes as “the main engine of growth in normal times” – was up by 0.3 per cent, but it’s still some way below its pre-pandemic level. KPMG put this down to a result of “successive negative shocks to real incomes”.
Analysts at the firm expect GDP to continue to grow at a modest pace of 0.5 per cent in 2024, and only to pick up towards its steady-state rate of around one per cent in 2025.
KPMG said a big question that could face businesses in 2024 will be whether to continue raising prices to repair margins or cut back on staff if demand is projected to remain weak in some sectors. It warned that both of these scenarios materialising at the same time could result in a double blow to household real incomes.
Headline CPI inflation dropped to 4.6 per cent in October on the back of lower energy prices. KPMG said this means the UK is no longer an outlier when compared to other major economies. But domestic influences – including a tight labour market, strong services price inflation, and firms passing on higher costs to consumers – continue to keep core inflation elevated.
The vacancy rate remains at four per cent or above in sectors such as hospitality and healthcare, while nominal pay growth was close to eight per cent in September. The unemployment rate sat at just 4.2 per cent in October, although recent issues related to data quality add more uncertainty around the current state and near-term trajectory of the labour market.
UK economy has outperformed expectations
KMPG said boosting labour market participation would help the country economically but that more could be done to assist that process, such as making further reforms to childcare support and raising the state pension age.
Yael Selfin, KPMG chief economist, said: “UK economic activity has outperformed expectations, but the outlook remains weak and vulnerable to shocks. Risks to the outlook are skewed to the downside, and stem from more persistent inflation, delayed impact of monetary policy, and structural weakness of labour supply.”
