The UK economy fell into a short if well-publicised recession last year but (at the time of writing) has largely outperformed expectations in 2024. This is despite the turmoil of a UK general election, conflict in Ukraine and the Middle East, and the US presidential election.
The FTSE 100 and All-Share Indices generally rose at the start of the year and have remained steady since May, albeit with periods of short-term volatility. More broadly, the economy has seen modest growth, and rising house prices suggest further reason to be optimistic as we head into 2025.
Inflation, meanwhile, is back in touching distance of the Bank of England’s target, even dropping below 2% (to 1.7%) for the 12 months to September. This led BoE governor Andrew Bailey to talk about the possibility of “more aggressive” base rate cuts in the future. The Monetary Policy Committee (MPC) promptly dropped the rate to 4.75%.
So what might 2025 bring for the economy, your savings and investments, and your long-term plan?
Keep reading to find out.
The UK economy is growing, albeit slowly, following a 2023 recession
Following its poor performance at the end of 2023, the UK’s GDP grew by 0.7% in the first quarter of 2024, followed by a 0.5% increase between April and June.
The latest Office for National Statistics (ONS) figures confirm a further rise of 0.2% in the three months to August. (It’s worth noting, though, that June and July saw zero growth, with the 0.2% arriving solely in August.)
While figures for Q2 put GDP 2.9% above pre-pandemic levels, this compares unfavourably to Eurozone GDP, which is 4.2% higher than before Covid, and the US, which is currently 10.7% higher than Q4 2019.
Source: UK Parliament
GDP is a measure of economic activity, so a rising figure suggests a population that is spending more and paying more tax, with employees seeing better salary increases and greater opportunities.
Reuters reports that the International Monetary Fund (IMF) now expects GDP to increase by 1.1% during 2024, an increase from 0.7% when it last completed a growth forecast.
Following Rachel Reeves’ Autumn Budget, the Office for Budget Responsibility (OBR) increased its GDP forecast for the next two years but this growth will be short-lived.
Source: BBC (from OBR figures)
Annual real GDP growth is expected to peak at 2% next year before falling back to around 1.5% later in the parliament.
Inflation appears to be under control, spelling good news for those feeling the pinch of rising living costs
The UK’s soaring inflation in the wake of Covid and the subsequent cost of living crisis have been well documented. The Consumer Prices Index (CPI) is now, though, closer to being under control.
In the below graph, you can see the October 2022 peak of 11.1%, which marked a 41-year high. Since then, it has been falling steadily.
Source: ONS
Having reached the BoE’s 2% target in May, inflation for the 12 months to September 2024 dropped to just 1.7%.
This is great news for those still struggling with high costs for everything from groceries to energy bills. High living costs have affected households throughout the UK for the last few years, with budgets tightened and a knock-on for long-term saving, investing, and pension contributions.
The BoE regaining control of inflation might allow you to re-concentrate your efforts to pay your future self.
Lower inflation is likely good news for borrowers too.
Mortgage holders could benefit from “aggressive” base rate decreases
The BoE base rate is used as a tool to tame inflation. When interest rates are high, the cost of borrowing increases but you also earn more interest on your savings. It is hoped that this will encourage saving while suppressing spending and reducing demand (and so the price) of goods.
As inflation soared, the base rate rose too, with a huge knock-on for mortgage holders. This situation was only exacerbated by the mini-budget of September 2022.
Source: BoE
After a sustained period of base rate rises, followed by a plateau, all eyes were on the BoE to drop the rate. The governor of the BoE, Andrew Bailey, spoke to the Guardian about the likelihood of a base rate fall and the ongoing fallout from the current crisis in the Middle East.
Bailey suggested that steadying inflation presented an opportunity for the BoE to become a “bit more aggressive” on interest rates, which is great news for borrowers as we head toward a new year.
At the most recent meeting of the MPC on 7 November, members voted to cut the base rate to 4.75%.
External factors will continue to influence the UK economy in 2024
Making economic predictions is fraught with danger, not least because of the myriad external factors that play a part.
Escalating tensions in the Middle East are likely to continue for some time. There’s also the impact of the US election result, with Donald Trump set to return to the White House early in 2025. Then, of course, there’s the continued effects of Rachel Reeves’ first Budget.
All eyes will be on global markets next year, but the best thing you can do is to focus on your own goals and plans. If you need any reassurance that you remain on track, be sure to contact us.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
