'Turning point' for UK economy as interest rates set to fall and tax cuts on the way

The EY Item Club has upgraded its outlook for UK growth in 2024, to 0.9% from the 0.7% it previously pencilled in last October

UK household incomes are expected to improve in 2024, marking a "turning point" for the economy.

This is due to falling inflation, interest rate cuts and tax reductions, according to a report. The EY Item Club has upgraded its outlook for UK growth in 2024, to 0.9% from the 0.7% it previously predicted last October.

Growth is expected to increase again in 2025, with an expected GDP increase of 1.8%, compared with the 1.7% previously predicted, according to EY's latest economic forecast. However, its growth prediction for the overall GDP outcome in 2023 has worsened, with the group downgrading its prediction to expansion of just 0.3%, having previously forecast GDP to rise by 0.6%.

There are fears that the UK may have entered a technical recession in the final quarter of 2023 as defined by two or more quarters in a row of negative output after a contraction in the third quarter and poor recent economic indicators for the closing months of last year. However, household incomes are expected to improve as Consumer Prices Index (CPI) inflation is predicted to fall to the Bank of England's 2% by May, the EY Item Club said.

The inflation rate is expected to average around 2.4% throughout 2024, which is lower than the previously predicted 2.8% by the economic forecaster in its autumn forecast. The future's looking brighter, as experts predict inflation will go down, leading to a "significant" drop in the bank rate for 2024.

It could fall from 5.25% to 4% over the next year, with the first cut possibly in May. Hywel Ball, the boss of EY in the UK, shared some hope: "While challenges remain, the forecast suggests that the UK's period of economic stagnation is slowly coming to an end.

"Households and businesses are still facing a tough outlook in 2024, due in part to the lagged effect of interest rate rises, but slowing inflation and anticipated bank rate cuts should help build economic momentum as the year progresses. A modest contraction is forecast for 2024, but this should be followed by a revival in capital expenditure in subsequent years."

Mr Ball added: "Falling inflation and declining market interest rates, coupled with the potential for additional tax cuts in the Chancellor's spring Budget, suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth." And for those worried about their homes, house prices are expected to stay pretty much the same this year, which is better than the 4% drop previously thought.

The report says that because not many people are out of work and most families have enough money, they will keep wanting to buy homes. This will help stop too many houses from being sold off when owners can't pay for them.

The report is hopeful that unemployment won't rise significantly and that there are lots of different kinds of jobs to keep people working. But, because interest rates went up last year, some people might find it hard to pay their bills and could lose their homes.

Martin Beck, of the EY Item Club, said: "Although it remains possible that the UK may have slipped into a technical recession in the fourth quarter of 2023, the mood music around the economy is justifiably improving. However, there are risks to the forecast. Ongoing geopolitical tensions could push up energy prices, which may slow the decline of inflation and increase costs for households and businesses."

Plus, he added: "Plus, while the Bank of England is expected to reduce interest rates this year, the timing and extent of these cuts remain uncertain and continued high rates could prolong financial strain."

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