UK economic outlook & policy update Autumn 2024

Economic growth is expected to gain momentum next year. Base rates will continue to fall, but at a slower rate and are likely to settle slightly higher than anticipated at 3.5% in 2026

Key facts

• UK economy forecast to grow by 2% next year, up from 1.1% this year
• Base rates will continue to fall, although more slowly, through 2025
• Activity rising in sales markets and demand remains strong for rental property

The UK economy grew in the first half of 2024, after falling into recession at the end of last year. Economic forecasts have been upgraded across the board, with the IMF now expecting the economy to grow by 1.1% this year.

The Chancellor announced some key changes in the Budget which will affect parts of the housing market. These include the additional 2% surcharge on stamp duty for those buying an additional homes, which has risen from +3% to +5%, and the return to 2022 stamp duty thresholds and rates from April next year as well as the lowering of nil-rate thresholds.

In its assessment of the Budget’s impact on the wider UK economy however, the Office for Budget Responsibility (OBR) said that the tax-funded spending moves announced by the Chancellor would create a temporary boost to GDP. It forecasts 1.1% GDP growth this year, 2.0% in 2025, 1.8% in 2026 before falling back to 1.5% in 2027 onwards. However, this stronger growth will also cause inflation to rise, to around 2.6% next year, according to the OBR. The more buoyant economic growth could slow down rate cuts next year, and there is a fine balance between the boost from spending, and the risk that the rise in National Insurance for employers announced at the Budget could act as a drag on growth if it inhibits investment and recruitment among large and medium-sized employers.

Even so, the Bank of England did cut rates at its most recent meeting on 7 November, by a quarter point from 5% to 4.75%, but it was more conservative in its messaging about rate cuts next year.

Given that economic growth is likely to be stronger next year, and inflation higher, interest rates may not fall as fast or as far as previously expected. Capital Economics forecast that rates will fall to 3.75% at the end of next year, falling to 3.5% in 2026, where they will settle. The OBR also forecasts that rates will settle at 3.5% in 2026 through to 2030. Even so, this still represents a significant drop from the current 4.75% rate, and these falls will translate into less expensive mortgages, which will benefit homebuyers.

Inflation fell in September, dropping to 1.7% after rising briefly in the late summer to just above the Bank of England’s 2% target. Core inflation, the measure of price rises excluding the more volatile food and energy sectors, also ticked down again to 3.2% in September, from 3.6% in August, and 6.1% in September last year.

Yet, even as the base rate was cut, the response to the Chancellor’s Budget, as well as international dynamics, not least the US election, meant that 10-year UK gilt rates rose in the first week of November. These rates determine the cost of fixed-rate mortgage pricing, so those looking for a new mortgage deal may not see the immediate effect of the Bank of England’s base rate cut.

The overall economic picture in the UK is reasonably upbeat, although the full impact of the National Insurance rise from next April remains to be seen. With the prospect of more rate cuts coming however, there is additional impetus in the central London residential markets, with our offices reporting higher levels of activity is we move towards the end of the year.  

Yet, even as the base rate was cut, the response to the Chancellor’s Budget, as well as international dynamics, not least the US election, meant that 10-year UK gilt rates rose in the first week of November. These rates determine the cost of fixed-rate mortgage pricing, so those looking for a new mortgage deal may not see the immediate effect of the Bank of England’s base rate cut.

The overall economic picture in the UK is reasonably upbeat, although the full impact of the National Insurance rise from next April remains to be seen. With the prospect of more rate cuts coming however, there is additional impetus in the central London residential markets, with our offices reporting higher levels of activity is we move towards the end of the year.