S&P upgrades forecast for the British economy

• Ratings agency now says UK GDP will expand by 0.6% this year, up from 0.3%
• S&P expects the Bank of England to cut base rate to 4.5% by the end of 2024 

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

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

Office for National Statistics data later this week will reveal how the UK economy fared in May after flatlining in April on the back of a decline in production and construction output. UK GDP is expected to have inched higher again for the month.

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

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

‘Investments were also strong, making up nearly half of the increase in activity, which suggests the effects of past interest rate rises is starting to fade. This was particularly visible in the construction sector.’

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

S&P said this fall is ‘mainly linked to a falling energy bill and less dynamic prices for food and non-energy goods’, noting that services inflation remains at 5.7 per cent largely as a result of wage growth.

It added: ‘As a result, we expect inflation to be marginally higher in 2024 (2.8 per cent), before receding to 2.4 per cent in 2025.’

S&P said that while ‘it’s still too early for the BoE to claim victory’, an impending slowdown in employment data and still-subdued consumer demand will lay the framework for the first interest rate cut in August.

The BoE opted to maintain base rate at 5.25 per cent last week, with members of the Monetary Policy Committee citing concerns about elevated services inflation.

S&P expects the BoE to cut by 25 basis points to 5 per cent in August, with another 50bps of cuts later this year taking base rate to 4.5 per cent by the end of 2024.

Click here to resize this module

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

‘Consumers are expected to return to shops as their purchasing power recovers and companies will continue ramping up investments, backed by falling input and borrowing costs.

‘Adding to that, a clearer policy path in the U.K. might offer a more business friendly environment than it has been in the years following the Brexit referendum, especially in the face of high policy uncertainty in other advanced economies.

‘The BoE will also have to consider the 12-18 month time lag between any rate cuts and their effects on the economy when starting to ease.

‘Overall, we believe a gradual approach to rate cuts is most likely, in particular due to the uncertainty regarding both the persistence of past supply shocks on inflation and the outlook for long-term economic developments.’