UK economy to stage ‘welcome recovery’ thanks to consumer rebound
Economic growth will accelerate this year thanks to falling interest rates and greater government spending, new forecasts from KPMG suggest.
The firm forecast that GDP will increase by 1.7 per cent over 2025 double the 0.8 per cent expansion anticipated for 2024.
“Buoyed by a looser monetary and fiscal policy stance, growth in the UK economy may stage a welcome recovery after a lacklustre performance in the second half of 2024,” it said.
KPMG expects consumer spending to drive the acceleration as real wages continue to increase and lower interest rates diminish the appeal of saving.
Consumer spending is expected to expand 1.8 per cent this year, up from 1.0 per cent the year before.
However, inflation is also likely to be slightly more persistent than previously expected on the back of stronger demand.
KPMG suggested that firms will be able to pass on much of the costs from the national insurance hike to consumers through higher prices. As a result, inflation will average 2.4 per cent in both 2025 and 2026, down only 0.1 percentage point from 2024.
This will mean that the Bank of England sticks to a gradual pace of interest rate cuts, with KPMG only predicting three cuts across the year.
“The risk of policy error remains high, which could prompt a slower and more deliberate approach from policymakers,” Yael Selfin, chief economist at KPMG UK said.
Although the outlook is relatively benign, Selfin drew attention to the possible risks from a “flare-up” in global trade stemming from Donald Trump’s protectionism.
0.4 per cent could be knocked off UK GDP in the event of a tit-for-tat tariff war while Europe’s export-oriented economies could be even worse off.
“Trade tensions and uncertainties about the scale and timing of tariff measures add another layer of uncertainty to the global economic outlook,” Selfin.