United Kingdom

The newly elected Labour government is taking over an economy that is picking up pace after a dismal 2023, when GDP barely grew at all (+0.1%), hit by the combination of high inflation and tight financial conditions eating into households’ disposable income, the housing market and corporates’ earnings. However, the economy started to recover strongly in H1 2024, buoyed by investment and accelerating household consumption. Inflation has dropped significantly, primarily driven by rapidly declining energy prices and softer food and goods inflation. This has been a welcome development for the UK economy at an aggregate level as lower price pressures are being driven by lower imported costs, supported by the appreciation of the sterling.

Furthermore, easing inflation has led to expectations that the Bank of England will start to ease monetary policy soon. This has already translated into easier access to credit and the bond market for corporates. In the housing market, the number of mortgage approvals is firming up. In all, we expect UK GDP to grow by +1.3% this year as financial conditions should continue to ease, followed by +1.9% in 2025, benefiting from the fiscal boost. However, should the Labour government decide to revert to a more ambitious program, stepping up plans to control immigration and implement further labor protections, growth could reach a trough of +0.7% in 2026, less than half of what it would have been under the baseline scenario, while inflation would stay above 3% as the sterling would depreciate by -7% to -10%.

The Bank of England will move cautiously amid sticky services inflation. While they are softening, core domestic price pressures, wage growth and services inflation are not compatible with inflation at 2% on sustainable basis. In this context, the BoE will want to maintain a hawkish bias until wage growth and services inflation normalize. The good news is that the labor market is cooling, signalling lower wage growth over the coming months. The BoE rate should reach 4.75% (from 5.25% currently) by the end of 2024, and 3.75% by the end of 2025.

After a hiatus during the pandemic, corporate risk in the UK is back with vigor as insolvencies are set to remain well above pre-pandemic levels in both 2024 and 2025. UK companies have showed resilience, managing to grow their margins even amidst the pressures of increasing labor costs, but tight financing conditions have put them under pressure.