Summary

• The first half of 2024 has seen a gradual, but clearly perceptible, improvement in U.K. economic momentum. Q1 GDP rose 0.7% quarter-over-quarter, while more recent sentiment and activity data point to ongoing growth in Q2. The outlook for the U.K. consumer continues to improve, although the outlook for U.K. businesses is perhaps not quite as robust. Overall, however, we see U.K. GDP growth firming to 0.8% in 2024 and 1.5% in 2025, from just 0.1% in 2023.

• The progress on the disinflation front arguably remains mildly frustrating. While headline inflation slowed to the Bank of England's (BoE) 2% target in May, underlying inflation measures and wage growth have slowed more gradually, and remain elevated by historical standards. Given still-elevated wage and price trends, we expect the BoE will initially proceed cautiously with its monetary easing.

• We see just two 25 bps rate cuts this year, in August and November, and forecast the BoE's policy rate to end 2024 at 4.75%. We expect a slightly faster pace of easing in 2025 as underlying inflation returns closer to the central bank's 2% inflation target. Altogether, we see a further cumulative 125 bps of BoE policy rate cuts in 2025, which would see the central bank's policy rate end next year at 3.50%.

• The Labour Party led by new Prime Minister Keir Starmer won a landslide victory in last week's election, securing 412 of the 650 seats in the House of Commons. Despite the landslide victory, we do not anticipate a significant impact on the U.K. economy or financial markets in the immediate period ahead. Should the new government be more cautious than expected on the fiscal front, it could if anything be less supportive of the growth outlook in 2025 than generally expected.