KPMG has become the latest City forecaster to lift its projections for the UK economy despite uncertainty about the likely strength of consumer spending.
The firm’s latest forecasts suggest the economy is on track to grow 1.0 per cent this year before accelerating slightly to 1.2 per cent next year.
The Big Four firm’s predictions are a slight upgrade on July’s projections of 0.5 per cent for 2024 and 0.9 per cent for 2025, reflecting the UK’s stronger than expected growth in the first half of this year.
In the first six months of 2024 the UK was the fastest growing economy in the G7, surprising pundits who had expected another year of relative stagnation.
However, despite the stronger growth, KPMG does not expect to see a particularly strong recovery in consumer spending. Instead it suggested that the recent increase in the savings ratio could prove “more permanent”.
The household savings ratio – the proportion of disposable income which households save – stood at 11.1 per cent in the first quarter of 2024, compared to an average of 6.3 per cent during the 2010s.
The savings ratio is particularly high given the relatively low rate of unemployment. With savings predicted to remain elevated, KPMG forecast consumer spending growth of just 0.4 per cent in 2024 and 1.4 per cent in 2025.
Chancellor ‘unlikely’ to stimulate faster growth
“Shifts in consumers behaviour, elicited by response to the recent series of shocks as well as by longer-term trends such as an ageing population…mean that businesses will need to closely re-examine both their customer and production strategies.” Yael Selfin, chief economist at KPMG UK said.
Selfin also drew attention to the upcoming budget, scheduled for 30 October, which represents the Chancellor’s first opportunity to start “building the base for stronger growth”.
But Selfin cautioned that the Chancellor will be unlikely to be able to stimulate faster growth without adjusting the fiscal rules, which require debt to be falling in five years time.
“[Growth] will inevitably require higher levels of public investment. However, the current fiscal framework will make it hard for the government to borrow significantly more,” she said.
Tweaking the fiscal rules to exclude the impact of the Bank of England’s bond sales would only free up an additional £16bn, Selfin estimated.