Morgan Stanley Downgrades UK Growth Forecast: Economic Challenges Ahead

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Morgan Stanley has recently revised its economic growth forecast for the UK, projecting a modest increase of only 0.9% for 2025, down from a previous estimate of 1.3%.

This downgrade reflects ongoing concerns about a sluggish economy and signs of labor market weakness, prompting analysts to reassess their outlook.

The investment bank’s updated forecast comes in the wake of stagnant growth observed in the latter part of 2024, particularly during the third quarter.

Despite two recent interest rate cuts by the Bank of England, the lingering effects of a peak interest rate of 5.25% continue to weigh heavily on economic activity.

Analysts at Morgan Stanley noted that while the most severe impacts of previous policy tightening may be behind us, the drag on growth remains significant.

Business Sentiment Deteriorates

Compounding these economic challenges are recent tax hikes outlined in the government’s budget, which have dampened business sentiment and led to warnings from companies about potential job cuts and reduced investments.

Many businesses are reporting a lack of demand, with hiring intentions dwindling and roles being eliminated at the fastest pace since the financial crisis, excluding pandemic-related disruptions.

Anticipation of Interest Rate Cuts

As policymakers prepare for their next meeting on February 6, 2025, there is widespread anticipation that the Bank of England will announce further interest rate cuts.

Morgan Stanley forecasts that rates could drop to 3.5% by year-end, with several cuts expected throughout the year. This aggressive monetary easing aims to support a stuttering economy and provide relief to consumers facing rising borrowing costs.

Inflation Uncertainty Looms

The outlook for inflation remains uncertain, with recent data indicating that while inflation pressures have eased slightly, they are still above target levels. Economists expect inflation to rise again in the spring, complicating the Bank’s decision-making process as it seeks to balance stimulating growth while controlling price increases.

Conclusion: A Cautious Path Forward

Overall, Morgan Stanley’s revised forecast underscores a cautious approach to the UK economy as it navigates through a challenging environment marked by low growth and high inflation.

The upcoming months will be critical in determining how these economic dynamics unfold and what measures will be taken to support recovery efforts.

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