Market Update: We break down the business implications, market impact, and expert insights related to Market Update: UK Economic outlook | KPMG UK – Full Analysis.
The conflict in the Middle East has resulted in an energy price shock to the UK economy. Households will be partially shielded until July thanks to the Ofgem energy price cap but face a likely rise in household energy bills in the third quarter.
Inflation is now expected to peak at more than 3.5% in the third quarter, with businesses likely to pass on price increases from higher energy costs to households. This could see the Bank of England cut interest rates only once this year, with additional cuts postponed until 2027.
The energy shock is set to weigh on economic activity, with households cutting back on discretionary spending as their purchasing power falls, while businesses potentially scale back investment due to higher financing and energy costs.
The UK’s relatively weak growth over the past two decades has opened up a substantial gap in living standards compared with the US and, to a lesser extent, the Eurozone. With UK households more exposed to the latest spike in energy prices than in some of these economies, that gap could widen further this year.
A largely uneventful Spring Forecast masked several competing pressures facing the Government, with the weaker growth outlook and higher interest rates now emerging as an additional headwind to fiscal headroom. If the Government acts to shield households from higher gas prices during the third quarter, we estimate the cost could be up to £5 billion.
The increasingly widespread adoption of GLP-1 drugs as a treatment for weight management has the potential to reach a significant share of the UK adult population over the next five years. The drug’s effect on appetite, appearance and overall preferences could drive significant shifts in spending away from out of home dining and grocery, and towards categories such as clothing and cosmetics. In addition, the current elevated cost of the drug could see a reduction of spent on goods and services deemed by consumers as non-essential as they find funds to cover it.
