Tax rises and drop in investment predicted to limit UK growth executes market move in market

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Tax Rises and Slowing Investment Forecast to Limit UK Economic Growth

Deal Background

According to the latest report from the EY Item Club, a leading UK economic forecasting group, the prospect of looming tax rises and a fall in business investment will restrict the UK’s economic growth rate next year to less than 1%. The Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, is also expected to downgrade the UK’s potential growth when it reports on budget day, based on a reassessment of productivity growth.

Motivations and Sector Signals

The EY Item Club has downgraded Britain’s growth for next year, indicating that the economy will continue to expand at a sluggish pace, limiting tax receipts and the chancellor’s financial room for maneuver. The report cites the “combination of potential tax rises, global trade disruption and high interest rates” as factors that are anticipated to “put a brake on economic momentum and produce modest growth over the next year.”

A survey by the Institute of Directors also indicated that growth would slow next year, following a steep decline in business confidence. Executives who responded to the survey, which mostly covers small- and medium-sized businesses, said they were beginning to recover from a spike in costs, which had accelerated at a faster pace than revenues over the last year.

Implications for Private Equity

The report suggests that the UK has remained a “competitive, stable investment destination during a period of international disruption,” and that “preserving that attractiveness and welcoming global capital will be crucial to the UK’s long-term economic prosperity.” However, the predicted slowdown in business investment and economic growth could have implications for private equity firms operating in the UK market.

Immediate Outlook

The EY Item Club has upgraded growth for this year to 1.5% from 1%, while maintaining the rate of expansion at 0.9% next year. Unemployment is expected to peak at 5% next summer, which will “drive a further slowdown in earnings this year, with pay growth expected to fall back to around 3.5% by the end of 2025 and 3% by the middle of 2026”.

Key Takeaways

• The UK’s economic growth is forecast to slow to less than 1% in 2026, due to the prospect of tax rises and a fall in business investment.
• The Treasury’s independent forecaster, the OBR, is expected to downgrade the UK’s potential growth, reducing the government’s income by £21bn before the end of the parliament.
• The predicted slowdown in business investment and economic growth could have implications for private equity firms operating in the UK market, though the UK has remained a “competitive, stable investment destination.”

Sources

• Guardian Business