The Macroeconomic Outlook

Paula Bejarano Carbo, Benjamin Caswell, Hailey Low, Monica George Michail, Stephen Millard and Max Mosley

National Institute UK Economic Outlook, 2024, issue 15, 23-42

Abstract: In line with the evolving nature of the whole forecasting process, the approaches used for setting the underlying assumptions are continually reviewed. Our current projections are conditioned on: The path for short-term policy interest rates shown in figure 2.1. We believe that interest rates have peaked at 5.25 per cent and will fall slowly from now onwards. Given our view that the equilibrium real interest rate is around 1.25 per cent, we expect nominal rates to level off at around 3.25 per cent. A path for the sterling effective exchange rate index that starts 0.3 per cent higher in the second quarter of 2024 than we were expecting at the time of our Spring 2024 UK Economic Outlook (Bejarano Carbo et al., 2024) and appreciates by a further 1.4 per cent over the course of 2024. However, sterling then depreciates over 2025 and 2026, in line with the uncovered-interest parity condition, to finish at roughly the same level as in the second quarter of this year. Fiscal policy evolving in line with announced government policies to date. Specifically, we imposed the paths for nominal government consumption, nominal government investment, nominal investment by public corporations, general government subsidies and miscellaneous government spending and tax revenue found in OBR (2024). We set the rate of income tax to 23.3 per cent for the fiscal year 2024-25, rising to 24.4 per cent for the fiscal year 2028-29 as the freeze in personal allowances raises the effective tax rate. These rates are in line with the implied rates suggested by the OBR forecasts for income tax revenue and personal income. Similarly, we set the rate of VAT to 18 per cent, the rate implied by the OBR forecasts for VAT revenue and nominal consumption. Finally, we set the rates of corporation tax for non-oil producers and oil producers to 23 per cent and 32 per cent, respectively, implying an average rate of corporation tax of 23 per cent, the rate implied by the OBR forecasts for corporation tax revenue and the gross operating surplus of corporations. Oil price assumptions for the short term that follow those of the US Energy Information Administration (EIA), published in July 2024, updated with daily spot price data available up to 12 July 2024. Oil prices, in US dollar terms, have increased since our last forecast in April by about 3 per cent, with the expectation for the oil price at the end of 2024 being marginally, around 2 per cent, lower than three months ago. The working age labour force participation rate staying flat at 77.8 per cent over the course of the next few years. Given the uncertainty around the participation data, and the ongoing issue of the large increase in long-term sickness, this is the most sensible neutral assumption we could make. Given demographic trends in the United Kingdom, we would expect the participation rate for the 16 plus population to fall over the medium run as the baby boomer generation continues to retire.

Date: 2024
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