UK needs to ‘get its mojo back’ as another forecaster warns of slow growth
The UK economy needs to “get its mojo back” or face sluggish growth over the next couple of years, a major economic forecaster warned.
In its latest Global Economic Outlook, KPMG forecast that growth would remain slow next year even though the UK has outperformed expectations this year.
The Big Four firm predicted that the UK economy would grow 0.5 per cent next year before picking up to 1.0 per cent in 2025.
KPMG’s forecasts for next year are less optimistic than the 0.7 per cent predicted by the Office for Budgetary Responsibility, but more hopeful than the Bank of England’s gloomy prediction of a 0.1 per cent expansion.
The report highlighted that a large part of the impact of higher interest rates are still to be felt, which will have knock on effects for consumption.
Around half of the direct impact of monetary policy on mortgage holders is still to come, it said.
Having been left on hold for three consecutive meetings, interest rates remain at a post-financial crisis high of 5.25 per cent.
While markets are increasingly convinced that rate cuts will begin in the first half of next year, policymakers at the Bank still stress it is too early to think about rate cuts.
KPMG said that the UK will continue to face stubborn inflation over the next couple of years. Inflation will average 2.8 per cent next year before falling to 2.1 per cent in 2025.
The report highlighted the UK’s tight labour market as a key driver of inflationary persistence. “Despite some loosening over the past year, the labour market is still fundamentally tight at its core,” the report said.
The tightness of the labour market stems largely from the rise of long-term sickness, which has increased to 2.6m. The government has announced plans to crack down on benefits claimants and offer greater incentives to encourage people back into work to tackle the problems.
“While boosting labour market participation would help the country economically, more could be done to assist that process, including further reforms of childcare support and an increase in the state pension age,” the report said.
The forecast comes shortly after fresh figures showed that GDP fell 0.3 per cent in October, reigniting fears that the UK might be facing a recession.
“While the UK economy is resilient, it needs to get its mojo back,” Yael Selfin, chief economist at KPMG UK, said.
“We expect monetary and fiscal policies to act as a headwind to growth over the next two years, and a sudden revival in productivity is not likely to come to the rescue,” she continued.