The UK economy is on course to slow sharply in H2-24. Real GDP was stable in Q3 against our expectation for an increase (0.3% QoQ) after 0.4% QoQ in Q2. Business surveys deteriorated during Q4. Furthermore, financial conditions have tightened since the Autumn Budget 2024 and quite meaningfully so since the beginning 2025: gilt yields have risen sharply (around 60bp since October) and sterling has depreciated (around 2% in trade-weighted terms). This has slid fiscal calculations into even worse territory. The government will have to announce more fiscal pain when the OBR's next forecasts are published in March. 

In December, we revised down our forecasts to 0.8% and 1.1% annual growth in 2024 in 2025 (versus 1% and 1.5% respectively three months ago). Risks now appear tilted to the downside relative to our already cautious forecasts. The recent spike in inflation expectations owing to global factors, higher-than-expected public spending in the Autumn Budget 2024, and the increase in borrowing costs have raised stagflation risks for the UK economy.  

The Autumn Budget 2024 prompted a downward revision of our forecasts for private consumption and corporate investment due to the higher tax burden announced by the Labour government as well as higher interest rates. Business labour costs will increase significantly in April 2025 due to the increase in the employer national insurance contributions (NICs) and the national living wage (NLW) announced in the Autumn Budget. This represents a new cost shock and will have repercussions on corporate margins, headcounts and investment projects. 

Monetary policy is more restrictive than forecast in October as a result of the fiscal stimulus. We lifted the Bank Rate forecast by 0.5pp for 2025. This in turn serves to rein in any excess demand, offsetting any positive effects of fiscal easing on growth.