UK Economy Report: High Interest Rates, Continued Uncertainty, Low Productivity Could Pose Challenges

According to KPMG’s latest UK Economic Outlook, the UK may struggle to maintain its growth in the second half of the year due to high interest rates, ongoing uncertainty, and low productivity. GDP growth is forecasted to be 0.4% in 2023 and 0.3% in 2024. While the labor market is slowly stabilizing, household excess savings have been mostly used up, and the impact of higher interest rates is starting to affect investment intentions, transaction volumes, and corporate insolvencies. The full consequences for households and the housing sector are yet to be seen.

Inflation is gradually decreasing but remains higher than in many other Western economies. The resolution of global supply chain bottlenecks and the decline in wholesale energy prices have helped alleviate some price pressures. However, domestic factors, supported by robust wage growth, have kept inflation elevated for a longer period. It is expected that inflation will not reach its 2% target until the latter part of 2024.

Not only is the UK facing challenges, but the global economy is also losing momentum. Trade volumes are declining, and manufacturing is retreating, causing difficulties for countries like Germany. Concerns are mounting about the rising price of oil and a potential slowdown in China, which could impede global growth.

Yael Selfin, Chief Economist at KPMG UK, mentioned that while interest rates may have reached their peak in this cycle, there is still uncertainty about their future trajectory. This, combined with ambiguity surrounding fiscal policy plans as the UK approaches an election year, might lead businesses to further delay their investment decisions.

The UK’s public finances are exposed to the fragile economic outlook and tighter financing conditions. The upcoming general election could result in new spending commitments to address immediate needs such as school safety concerns or budget deficits. Additionally, an increase in defense spending is likely. Nevertheless, there are long-term challenges to overcome, including an aging population, a slowdown in workforce participation, and the significant costs associated with combating climate change. These factors will make the job of any future Chancellor difficult.

To conclude, the UK’s economic outlook is uncertain, with various factors contributing to the challenges ahead. It is crucial for policymakers to address these issues effectively to ensure sustainable growth and stability for the future.

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