A prominent forecasting study suggests that the UK economy will experience a boost in the second half of the year due to declining inflation and lower interest rates, leading to increased growth and enabling the government to offer pre-election incentives. The advisory firm EY Item Club, supported by EY, predicts that economic stagnation will diminish as falling inflation, potential interest rate cuts, and tax reductions generate momentum for growth in 2024 and 2025.

This positive outlook aligns with recent hints from Chancellor Rishi Sunak and Jeremy Hunt about potential tax cuts in the upcoming budget statement in March, building on previous promises such as the reduction in national insurance implemented in January.

Further tax cuts may be unveiled in the autumn statement of 2024 ahead of an anticipated general election by the year’s end, assuming the projected recovery progresses as expected. Despite concerns about a recession in the latter part of last year and the possibility of negative growth in the first quarter of 2024, the forecast remains optimistic, anticipating signs of a recovery to manifest soon.

The forecast has been revised upward, with the UK economy now expected to grow by 0.9% in 2024 and 1.8% in 2025, reflecting an improvement from previous predictions. Although last year’s growth was downgraded due to factors like persistently high inflation and elevated interest rates, the outlook remains cautiously positive, contingent on factors such as inflation decreasing to 2% by April and the Bank of England commencing interest rate cuts in June.

While the possibility of a recession looms, recent data showing increased demand in various sectors, including property, travel, and consumer spending, suggests a growing confidence among businesses. Despite uncertainties stemming from global events, including geopolitical tensions and energy price fluctuations, the overall sentiment regarding the UK’s economic prospects has significantly improved over the past year.

EY Item Club anticipates a decrease in interest rates from 5.25% to 4% by the end of the year, further supporting the anticipated economic recovery. However, the forecast acknowledges potential risks that could undermine these projections, emphasizing the need for vigilance and continued monitoring of economic developments in the coming months.