S&P improves its forecasts for the British economy

S&P Global Ratings has upgraded its forecast for UK economic growth after a better-than-expected start to the year and ahead of the boost from impending interest rate cuts.

The ratings agency on Monday raised its forecast for UK economic growth for 2024 to 0.6 per cent, from just 0.3 per cent previously, on the basis that inflationary pressures will continue to ease and the country will also will benefit from the “improved terms of trade.” .

Data from the Office for National Statistics this week will reveal how the UK economy fared in May after stagnating in April due to a decline in manufacturing and construction output. UK GDP is expected to have risen again during the month.

S&P said 2024 had “started strong for the UK economy” after expanding 0.6 per cent in the first quarter, “more than offsetting” the contraction seen in the second half of last year.

He added: ‘Improving terms of trade are helping, with net trade being the biggest contributor to GDP growth as imports contracted more than exports.

‘Investments were also strong and accounted for almost half of the increase in activity, suggesting that the effects of past interest rate hikes are starting to fade. This was particularly visible in the construction sector.’

UK consumption is also showing signs of strength, with retail sales beating expectations last month as inflation finally returned to the Bank of England’s 2 per cent target.

S&P said this drop is “primarily linked to a drop in energy bills and less dynamic prices for food and non-energy goods,” noting that services inflation remains at 5.7 percent largely as a result. result of wage growth.

He added: “As a result, we expect inflation to be slightly higher in 2024 (2.8 percent), before falling back to 2.4 percent in 2025.”

S&P said that while “it is still too early for the Bank of England to claim victory”, a looming slowdown in employment data and still subdued consumer demand will set the stage for the first interest rate cut in August.

The Bank of England opted to keep the base rate at 5.25 percent last week, with members of the Monetary Policy Committee citing concerns about high services inflation.

S&P expects the Bank of England to cut 25 basis points to 5 percent in August, and another 50 basis points of cuts later this year will take the base rate to 4.5 percent by the end of 2024.

The ratings agency said: “Falling inflation, easing monetary policy and improving terms of trade should help the UK economy rebalance over the next two years and return to potential growth, absent of other shocks”.

“Consumers are expected to return to stores as their purchasing power recovers and businesses will continue to increase investment, supported by falling input costs and borrowing.

‘Furthermore, a clearer political path in the UK could offer a more business-friendly environment than in the years following the Brexit referendum, especially given the heightened political uncertainty in other advanced economies.

‘The Bank of England will also have to consider the 12 to 18 month time lag between any rate cut and its effects on the economy when it begins to ease.

“Overall, we think a gradual approach to rate cuts is most likely, particularly given uncertainty regarding the persistence of past supply shocks on inflation and the prospects for long-term economic development.”