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The UK economy is set for a spring boost as inflation falls below the 2% target, the Bank of England cuts interest rates and the current period of stagnation comes to an end, according to forecasts by Bloomberg Economics.
Inflation has fallen faster than expected and wholesale gas and electricity prices have continued to tumble, setting the UK up for “modest, if unspectacular, growth” in the second half of the year, UK economists Dan Hanson and Ana Andrade wrote in a report published Thursday.
The improved outlook and rapidly falling inflation will give the BOE “ample space to start easing.” Hanson and Andrade expect a first quarter-point rate cut from 5.25% in May and for the BOE to take rates down to 4% by the end of the year.
An economic rebound could help Prime Minister Rishi Sunak’s Conservative Party, which is around 20 points behind the Labour opposition in opinion polls ahead of a general election expected this year. Market expectations that rates will be cut have already handed Chancellor Jeremy Hunt roughly £10 billion ($12.6 billion) of headroom for the tax cuts he wants to deliver in the March budget.
Hanson and Andrade revised up their forecasts after November inflation fell faster than expected and energy costs stayed lower. They still expect “a very mild technical recession in the near term,” with the economy shrinking 0.1% in each of the third and fourth quarters of 2023 and the first quarter of 2024.
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Beyond that, “activity looks likely to pick up steam from the spring, buoyed by a boost to real incomes from lower energy prices, as well as falling interest rates,” they write.
Deutsche Bank senior economist, Sanjay Raja, also struck an upbeat note in a blog entitled “eight reasons for some optimism.” He expects inflation to drop to the 2% target in April or May and thinks it is “possible” rates could be cut to 4% be the year end. “A soft landing remains our base case,” he said.
Simon French, chief economist at Panmure Gordon, and former BOE ratesetter Charles Goodhart have said the UK consumer will come to the rescue this year as incomes rise faster than inflation. The minimum wage, the state pension and working-age welfare benefits will all rise by more than treble the anticipated 2% inflation rate in April.
Raja believes wage growth will also remain elevated and the government will cut taxes again in the budget, giving households a spending windfall. The 2% cut in national insurance contributions from this month announced in November will add £10 billion to incomes this year.
A 1% cut in the basic rate of income tax in April would add another £4 billion this year, and a halving of the inheritance tax rate to 20% would be worth close to £1 billion more for 2024.
