UK economy ‘will grow faster than forecast’, Says KPMG

Labour is set to override local councils to construct data centres on the green belt as Sir Keir Starmer’s Opposition seeks to enhance the UK's artificial intelligence sector.

The UK economy is set to grow more rapidly than initially forecast, suggesting that Sir Keir Starmer could inherit more stable economic conditions if Labour wins the general election on Thursday, as anticipated.

New forecasts from consultancy KPMG indicate that GDP growth will rise to 0.5% this year, an upgrade from the previous estimate of 0.3%. This follows a modest growth of 0.1% last year. The 2024 growth rate has also been revised upwards to 0.5% from the earlier projection of 0.3%.

The economy is expected to expand by 0.9% in 2025, supported by a series of interest rate cuts by the Bank of England as inflation subsides. KPMG anticipates that the Bank’s base rate could decrease to around 3% next year from the current 5.25%, a 16-year high.

KPMG noted that the economy is “turning a corner” after struggling since the pandemic began in 2020. Severe inflation, rising interest rates, and a surge in living costs driven by higher global energy prices following Russia’s invasion of Ukraine have hampered economic growth.

Yael Selfin, KPMG UK’s chief economist, commented: “Political uncertainty will now resolve sooner with a summer election and a potential fiscal event in the autumn, setting out the new government’s economic agenda. This could be aided by gradual cuts in interest rates, which look likely despite a small rise in inflation above its target expected later this year.”

Evidence suggests the incoming government will benefit from more stable economic conditions post-election. Inflation has dropped to the Bank of England’s 2% target for the first time since July 2021. Additionally, the Office for National Statistics recently revised its estimate for first-quarter GDP growth to 0.7%, up from 0.6%.

The Bank of England is expected to commence interest rate cuts at its next meeting on August 1. KPMG predicts that a slowdown in price growth could lead to several base rate reductions over the next 18 months.

However, KPMG cautioned that despite the uptick in growth, the next government will face a challenging fiscal environment. “The fiscal reality is similar for whichever party wins the general election on July 4,” it said. “Interest rates are set to remain higher, debt more difficult to bring down and spending pressures on health and defence continue to mount.”

Both Labour and the Conservatives have faced criticism for overlooking the strain on public finances during the election campaign. Current fiscal plans, outlined by Jeremy Hunt in his March budget, suggest unprotected government departments, such as local government and the justice system, could see real-terms cuts of about £20 billion.

Starmer and Rishi Sunak have both ruled out increases to income tax, national insurance, and VAT, the three primary revenue sources for the government. Such commitments imply that the next government will need to increase borrowing, breach existing fiscal rules, or implement significant public spending cuts.

The Labour leader has pledged to bring stability to economic policymaking and reform the planning system to boost economic growth, thereby raising funds for the Treasury to support public services.