EY Item Club upgrades UK growth forecasts for 2024 and 2025

A quicker-than-expected drop in inflation is expected to support UK growth in 2024 and beyond, according to EY Item Club, which has upgraded its economic projections for the next two years.

According to the EY ITEM Club’s new Winter Forecast released on Monday, the UK’s "prolonged period of economic stagnation" should begin to ease this year as slowing inflation, interest rate cuts and tax reductions give the economy momentum in 2024 and 2025.

The economic forecasting group is now predicting 0.9% and 1.8% GDP growth in 2024 and 2025, up from October's estimates of 0.7% and 1.7%, respectively.

Meanwhile, inflation – which averaged 7.3% in 2023 – is now expected to average 2.4% in 2024, lower than the 2.9% predicted in the Autumn Forecast, "suggesting a more positive outlook for real household incomes", EY Item Club said. Inflation is expected to reach the Bank of England’s 2% target by May.

As such, it continues to expect the BoE to begin cutting interest rates from the current 5.25% level as early as May, but has now pencilled in 100-125 basis points of cuts this year, up from the previous projection of 100 basis points.

Martin Beck, EY Item Club's chief economic advisor, said: “Although it remains possible that the UK may have slipped into a technical recession in Q4 2023, the mood music around the economy is justifiably improving.

"High inflation and expensive borrowing costs have been two of the biggest obstacles to growth recently and, with both showing encouraging signs of subsiding, prospects for late 2024 and beyond appear brighter."

However, he did highlight that there were risks, such as ongoing geopolitical tensions which could push up energy prices, while the timing and extent of interest-rate cuts "remain uncertain".