Modest UK economic growth to lead Bank of England to cut rates gradually: Reuters poll

A Reuters poll of economists forecasts mild UK economic growth of 1.0% in 2024 and 1.2% in 2025, largely unchanged from previous projections despite tariff uncertainty. The Bank of England is expected to hold rates steady next week, then implement quarter-point rate cuts in August and in the final quarter of the year, bringing the Bank Rate to 3.75%. Inflation is projected to remain elevated in the near term before easing below 3.0% early next year.

Analysis

The British economy is projected for modest growth, with economists in a June Reuters poll forecasting a 1.0% expansion in 2024 and a slight acceleration to 1.2% in 2025, figures largely unchanged since February and consistent with Office for Budget Responsibility projections. Despite a stronger-than-expected 0.7% GDP growth in Q1 2024, a significant slowdown is anticipated, with growth expected to fall to 0.1% in Q2 2024 and 0.2% in Q3 2024, followed by a forecast 0.3% rise in activity during the final three months of 2025. Inflation is projected to remain elevated, averaging 3.4% in Q2 and 3.3% in Q3 2024, before poll medians show it easing below 3.0% in early 2025. In response to recent data indicating a slight rise in the UK jobless rate and slowing wage inflation, the Bank of England is widely expected to hold its Bank Rate at 4.25% in the upcoming meeting, but then implement two quarter-point rate cuts by year-end – one in August and another in the final quarter of 2024 – bringing the rate to 3.75%. While tariff uncertainty persists, particularly concerning U.S. trade policy, economists like James Smith from ING assess the macroeconomic impact on the UK as limited, given that goods exports to the U.S. represent only about 2% of GDP, although specific sectors such as automotive, steel, and pharmaceuticals face direct exposure. The survey underpinning these forecasts was completed prior to finance minister Rachel Reeves’ planned comprehensive spending review on June 11, which is anticipated to allocate increased funding towards health and defence.

Key Decisions for Investors

• Adopt a cautious outlook for UK domestic cyclical stocks due to projected sharp near-term economic slowdown to 0.1%-0.2% quarterly growth in mid-2024, despite expectations of 1.0% annual growth this year.
• Consider potential opportunities in UK fixed income or rate-sensitive equities as the Bank of England is forecast to cut interest rates twice to 3.75% by the end of 2024 in response to weakening economic indicators.
• Monitor the details of the June 11 government spending review for sector-specific implications, particularly in health and defence, and assess its potential to alter the current subdued growth projections.
• While overall UK economic risk from US tariffs is viewed as contained, investors should review portfolio exposure to specific industries like automotive, steel, and pharmaceuticals that are in the 'firing line'.