Metis AM
Each year, a host of finance sector leaders make economic predictions and forecasts. But you could be wondering: “How accurate are they?”
Economic predictions for 2024 varied across industries, but the general consensus was that the UK economy would rebound following a few challenging years. Experts predicted that inflation would drop, which it did, and many assumed the Bank of England (BoE) base interest rate would begin to fall, which it did.
However, the accuracy of these forecasts became a topic of debate, as the predictions were extremely varied at the very start of the year. Few institutions were able to accurately predict when inflation would fall, and some estimated that the base rate would start to drop months before it eventually did.
With 2024 behind us, and a slew of predictions and results to unpack, let’s examine how the year’s actual economic performance measured up against those initial predictions, and what you might expect for 2025.
The UK’s overall economic performance in 2024 remained stagnant and lower than expected, despite initial optimistic outlooks
PwC began the year by stating that the outlook for 2024 was “far rosier” than expected, and 2024 would be the year the UK “turned a page”.
Indeed, looking back at the early 2024 forecasts, economists presented a range of expectations. While all final figures for 2024 won’t be readily available until early 2025, data suggests that the year fell a touch short of initial projections.
Here’s how the predictions played out in reality.
The base rate
According to the Telegraph, economists at Goldman Sachs said the BoE would start to decrease the base rate in February. Conversely, the Confederation of British Industry (CBI) expected the base rate to remain at 5.25% throughout the year.
In reality, the BoE maintained its base rate of 5.25% for most of the year, decreasing it to 5% in August, followed by another reduction to 4.75% in November.
Inflation
Inflation remained a persistent concern throughout 2024, though by November, (ONS) reported it had settled at 2.6%, down from 4% according to the ONS figures released in January 2024.
In terms of predictions, Reuters estimated that inflation would decline to 2% by April or May. It did, in fact, drop to 2% – the BoE’s target – in May, and remained there until June before rising again.
Alternatively, the British Chambers of Commerce predicted a 3.1% CPI inflation rate for Q4 2024.
This shows that, not only can predictions vary between institutions, but they can also waver between near accuracy and total inaccuracy.
Gross domestic product (GDP) growth
The CBI also forecast a year of weak growth for 2024, anticipating 0.8% economic growth. It said that consumer spending would remain temperate, unchanged from 0.4% in 2023.
In contrast to the CBI, The British Chambers of Commerce more accurately anticipated a 0.4% growth in the economy.
While the services and construction sectors demonstrated some growth, the production sector saw declines.
This uneven performance likely contributed to the UK’s Q3 2024 GDP growth being lower than that of both the eurozone (0.4%) and the US (0.8%). The House of Commons Library states that GDP did not grow at all in Q3, following a 0.7% increase in Q1 and a 0.4% increase in Q2.
Expectations for 2025 indicate a lower base rate, steady inflation, and subtle GDP growth
The BoE has held the base rate at 4.75% since November, and it’s likely we’ll only see a few further decreases over the next year. According to This is Money, markets are pricing in 3 to 4 interest rate cuts between now and the end of 2025.
Where inflation is concerned, according to Reuters, the Office for Budget Responsibility claims that inflation should average 2.6% in 2025. Although this is above the BoE’s 2% target, it’s important to remember that minor fluctuations in the rate of inflation are normal.
Finally, Goldman Sachs has forecast a 1.2% increase in GDP in 2025, which is lower than the BoE’s estimate of 1.5%.
All this said, as you read above, forecasts published at the beginning of the year aren’t always accurate.
Reacting to forecasts isn’t always the right move
Predictions can be helpful, but they’re not a perfect science.
A forecast may be based on historical data and assessments of the economic climate, but we can’t always predict what’s going to happen in any given month or year. Major global events could rattle the markets, supply chains could slow, and changes to public policy can also have an impact on share prices.
While you can’t control what happens in the markets or our economy, anticipating and preparing for upcoming changes (without resorting to rash actions) can help mitigate any unwelcome surprises. That’s where predictions can be useful, but without concrete evidence and professional support, acting on assumptions about future fiscal events could prove more hindrance than help.
Indeed, looking at a few recent world events and their financial consequences, you can see how quickly forecasts can become unreliable when faced with the unexpected:
- The economic challenges presented by the pandemic and subsequent lockdowns.
- The BoE’s interest rate hikes, implemented in order to curb the persistent inflation that resulted from the pandemic.
- The economic and market turbulence following the October 2022 mini-Budget.
- Global supply chain disruptions and potential effects on the world economy caused by ongoing conflicts around the world.
Ultimately, the economy, investment markets, and large financial institutions like the BoE, have a way of bouncing back – even from major upheaval.
The above events are just a few examples, but they demonstrate why sticking with your financial plan may still be the best option.
Your goals don’t need to change as a result of events outside of your control – and if you are concerned about the economy, investment markets, or any other element that could affect your plans, it may be wise to consult a professional before acting on forecasts.
Get in touch
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
