1. Macroeconomic context
◼ The surge in energy prices over 2022 has largely reversed. With headline CPI at 2.2% in July and signs of a looser labour market, the Bank of England cut interest rates from 5.25% to 5.00% in August. We expect headline inflation to fall below the 2.0%-target next year, as spare capacity in the economy and a looser labour market help to bring down services inflation. This should allow the Bank to cut the policy rate further, to 4.50% by the end of 2024 and to 3.00% by the end of 2025 ◼ The UK economy fell into a mild recession at the end of last year, but the recovery has already begun. Lower inflation and further cuts to interest rates should help to support economic activity. We expect real GDP to average 1.2% in 2024 and a stronger 1.5% in 2025 and 2026 ◼ An AI-fuelled boost to productivity should enable real GDP to grow by an average of 1.7% per year over the next decade. That is stronger than the 1.2% average per year seen over 2007-2019
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