The Bank of England is set to release new economic forecasts next week that could challenge Prime Minister Keir Starmer’s ambitious growth plans. Economists expect the BOE to indicate that the UK’s long-term growth potential is less than 2%, below Starmer’s target of 2.5% annual growth. This presents a challenge for Chancellor Rachel Reeves, who must navigate tough decisions regarding public sector pay raises and addressing the country’s struggling public services.
Labour’s plans to boost the minimum wage and public sector pay also risk slowing the pace of potential interest rate cuts. The BOE’s announcement comes at a time of significant economic uncertainty. Market observers will closely watch the implications of these forecasts on Labour’s economic strategy and broader financial conditions in the UK.
If the BOE’s predictions align with economists’ expectations, the Labour government may need to revise its strategies to promote sustainable growth. This could involve more conservative fiscal measures or re-evaluating the scale and timing of public sector pay increases and minimum wage hikes. As the UK awaits the BOE’s updated economic outlook, Labour’s ambitious growth plans face a critical reality check.
The findings could necessitate difficult policy choices to align aspirations with economic realities, ultimately shaping the nation’s future financial landscape. The official statistics for May showed GDP growth at 0.4%, one of the fastest monthly paces since 2000. Services grew by 0.3%, construction by 1.9%, and production by 0.2%.
Inflation is back to 2%, and unemployment is at 4.4%, lower than at any point under the Blair and Brown administrations.
BoE findings impact Starmer’s strategy
Despite these positive indicators, Labour wants to justify aggressive taxes on pensioners, savers, property owners, and the self-employed by claiming they have inherited the worst economic situation since World War II.
However, compared to the 2010 handover of power, inflation and unemployment are nearly half of what they were then, and the UK has the fastest growth in the G7. Under Labour’s government, we can expect more interventions and taxes, likely on property values, rentals, inheritance, savings, pensions, and luxury goods. This will be justified by Reeves’s “bad economy” narrative, already condemned by the Institute of Fiscal Studies.
With likely above-inflation pay settlements for nurses and teachers without productivity gains, we can expect a larger and less productive state sector funded by increased taxes on the private sector. This is not a recipe for economic growth and lower debt, but the reverse. The latest UK Economic Outlook explores the likelihood of the UK securing the highest sustained growth in the G7, given current domestic and international challenges.
The report shows that the UK economy is gradually gaining momentum, with annual GDP growth revised to about 1% for this year and a further increase to around 1.8% by 2026. Over the next decade, current projections indicate that the UK is likely to be the third-fastest-growing G7 economy, behind the US and Canada. This is partly due to long-term issues specific to the UK, such as the rise in post-pandemic economic inactivity, increased non-tariff trade barriers with the EU, and continued low productivity growth due to insufficient public and private investment.
A UK chief economist highlighted three key areas where the government and businesses can make a difference: reducing economic inactivity rates, developing a comprehensive industrial strategy, and leveraging artificial intelligence to enable workers to focus on higher-value-adding activities. Economic growth is likely to differ geographically across the UK, with London and Northern Ireland leading for 2024, while the West Midlands, South East, and North East are expected to lag. Inflation is now under control, but the disinflation process is not complete, with services inflation remaining a key “known unknown.”
