The impact of the next General Election

The confirmation of a “technical recession”—defined as two consecutive quarters of negative GDP growth—in late 2023 marked a difficult end to a challenging economic period for the United Kingdom. While shallow, this downturn highlighted the fragility of the economy, struggling under the weight of high inflation, elevated interest rates, and structural productivity deficits. The key question now is not just when the UK will exit this mild recession (a recovery largely anticipated in 2024), but how the new political and policy landscape will transform this weak rebound into a period of sustainable, long-term economic growth.

I. The Nature of the Recovery: Weak Momentum

Economic forecasts largely agree that the UK has now exited or is in the process of exiting the recession, but the immediate outlook is for slow and subdued growth. The recovery is primarily a cyclical adjustment driven by three key factors:

1. Falling Inflation and Real Income Growth: The primary driver is the significant fall in the Consumer Prices Index (CPI), which has boosted household finances. As wage growth continues to outpace cooling inflation, real disposable income has increased, which in turn fuels consumer spending—the largest component of UK GDP.
2. Monetary Policy Easing: Following the peak of inflation, the Bank of England is anticipated to begin cutting its base interest rate, which has been held high to tame price rises. Lower borrowing costs will eventually reduce the burden on mortgage holders and encourage a modest revival in business investment.
3. The Service Sector Resilience: The UK’s dominant service sector, particularly financial and professional services, is expected to lead the modest expansion, offsetting the continued weaknesses in manufacturing and trade .

However, growth projections for 2025 and 2026 generally remain low, often hovering just above the 1% mark. This signals a “low-momentum recovery,” one that pulls the UK out of recession but fails to meaningfully raise living standards or tackle underlying economic problems.

II. Structural Barriers to Durable Growth

The path to a stronger expansion is blocked by several deep-seated structural issues that successive governments have struggled to resolve:

III. The Impact of the General Election: A New Policy Blueprint

The recent General Election resulted in a change of government, ushering in a new economic and political blueprint centered on stability, state-led investment, and public service renewal.

1. Macroeconomic Policy: Stability First

The new government has sought to reassure markets by committing to strict fiscal rules, promising that day-to-day spending will be financed by tax revenues and that debt will be falling as a share of GDP by a certain point. This commitment to stability is intended to foster an environment where interest rates can continue to fall, but it severely limits the scope for significant new spending.

2. The Investment-Led Strategy

The core of the new government’s growth strategy is a pivot toward strategic, state-backed investment, in partnership with the private sector:

• Green Energy & Industrial Strategy: A primary focus is on accelerating the transition to net zero, notably through the creation of Great British Energy (GB Energy). This public investment vehicle aims to support clean power projects, create jobs, and enhance energy independence. The strategy is to foster growth by identifying and backing sectors where the UK has a competitive advantage (e.g., offshore wind, carbon capture).
• Planning and Infrastructure Reform: Efforts are underway to overhaul the complex planning system to accelerate the delivery of major infrastructure projects, housing, and industrial zones. Easing these supply-side bottlenecks is seen as crucial to boosting overall productivity and capacity .
• Labour Market Reform: The new government has proposed changes to employment rights, skills training, and welfare-to-work programmes, aiming to raise the quality of employment and reduce the long-term inactivity that has been a drag on the economy.

IV. The Outlook: A Challenge of Delivery

The success of the UK’s post-recession recovery hinges less on the initial cyclical rebound and more on the ability of the new government to implement its ambitious, investment-led agenda.

• The Funding Gap: The biggest political and economic challenge is delivery. Meeting ambitious public service targets and large-scale investment goals while adhering to tough fiscal rules is inherently difficult, potentially necessitating more difficult decisions on tax increases or deeper departmental spending cuts in the years ahead.
• Geopolitical Risk: Global factors, including ongoing trade tensions and conflicts, continue to pose downside risks to the outlook for trade and energy prices, which could yet derail the domestic recovery.

In summary, the UK economy is transitioning from a period defined by inflation to one defined by the growth challenge. The new government has laid out a clear direction—prioritizing strategic investment and stability—but the pace and resilience of the UK’s long-term recovery will be a direct function of its ability to execute this blueprint against a backdrop of tight public finances and persistent global uncertainty.