The UK economy will grow faster than expected over the next three years, according to the latest economic forecast from the British Chambers of Commerce.
Having recovered from a short recession last year, the UK economy has performed better than expected in 2024, said the business organisation.
It says it expects the economy to grow by 1.1 per cent in 2024, with the projection for 2025 remaining at 1.0 per cent. The economy is expected to grow by 1.1 per cent in 2026 – a minor upward revision.
However, the business organisation warned that the overall growth landscape remains relatively weak, with government spending the main driver of GDP this year.
Household consumption is expected to increase significantly in 2025 as the impact of lower inflation and interest rate cuts kick in, it said.
The Consumer Price Index is expected to be slightly higher than previously forecast by the end of 2024, at 2.6 per cent due to global trade uncertainties, pay growth, and rising energy costs.
It is then expected to slow, closer to the Bank of England’s two per cent target, reaching 2.2 per cent in Q4 2025 and 2.1 per cent in Q4 2026.
The Quarterly Economic Forecast said business investment in 2024 will be slightly down on previous forecasts at 0.3 per cent, but it is expected to grow by 1.4 per cent in 2025 and two per cent in 2026.
In other findings, the body said it the outlook for overseas trade remained weak due to ongoing trade barriers with the EU, with both imports and exports contracting in 2024 by -0.6 per cent and -1.1 per cent, respectively, before a gradual bounce back in 2025 and 2026.
Average earnings are expected to grow more slowly over the forecast period but continue to remain above inflation.
Annual wage growth is expected to be four per cent in Q4 2024, remaining at the same level in Q4 2025, before falling to 3.5 per cent in Q4 2026.
The average unemployment rate is expected to be 4.3 per cent in 2024, rising slightly next year to 4.4 per cent, before easing to 4.1 per cent in 2025.
However, youth unemployment will remain high, with the percentage out of work forecast to be 13.3 per cent this year, 13.4 per cent in 2025 and 13.1 per cent in 2026.
David Bharier, head of research at the British Chambers of Commerce, said: “The UK economy has grown at a higher than expected rate in the first half of this year, following a short technical recession in 2023, and our upward GDP revision for 2024 reflects that.
“However, widespread uncertainty could weigh down on growth expectations for 2025 and 2026. Major global conflicts, trade tensions, and an impending US election could all feed into a climate of hesitation for firms, particularly those involved in global trade.
“Our recent business surveys have shown increasing confidence among SMEs, but the majority tell us they are still struggling to increase investment. Further cuts in interest rates will help.
“Next month’s Budget is a crucial opportunity for the Government to boost business growth and maintain competitiveness. Firms are also keen to see clear details of an industrial strategy that will drive economic growth.”
Vicky Pryce, chair of the BCC Economic Advisory Council, said: “The BCC’s latest forecast shows that while the UK economy will perform better this year, it’s unlikely to be heading into the fast lane any time soon.
“Although domestic demand should be helped by a gradual reduction in interest rates and by rises in real wages as inflation stabilises, firms will still struggle to invest.
“This is due to continuing global economic and political uncertainty, alongside a downbeat Government assessment of its fiscal position and warnings of tough decisions in the budget.
“As we head towards the Chancellor’s first budget at the end of October, businesses will be wanting the government to focus on measures that boost investment, support growth and maintain competitiveness.”
Shevaun Haviland, director general of the BCC, met Chancellor Rachel Reeves last week for discussions described as ‘positive’.
“We outlined our priorities for the Autumn Budget, recognising the public finance challenge. Boosting economic growth and investment is crucial, while maintaining a fiscal environment that protects the UK’s business competitiveness,” she said.
“We welcome the Chancellor’s pledge to work with us on plans for an industrial strategy and to boost infrastructure investment.
“We look forward to more discussions with the Chancellor and the Treasury team ahead of her statement on October 30.”