Investing.com — The U.K. enters autumn as the fastest-growing economy in the G7, but Deutsche Bank warns that momentum is set to cool in the second half of the year.
The broker’s chief U.K. economist Sanjay Raja said sectors like information and communications technology have driven much of the recent strength, growing at an annualized pace of almost 9% in the first half of the year on the back of AI-related spending. U.K. productivity also appears to have “finally turned a corner,” he wrote.
Still, Raja flagged several reasons for a second-half slowdown. One-off boosts to GDP from a hot summer and the World Cup will naturally fade, while rising energy prices are expected to squeeze real disposable incomes as household dual-fuel bills climb starting in the third quarter. Seasonal drags are also likely to weigh on momentum, with growth unlikely to sustain its roughly 2% annualized pace into the second half, the economist said.
Inflation pressures have “thus far” been relatively tamed, Raja said, with services CPI at a cyclical low of 3.4% year-over-year and food prices at their lowest rate in five years, at 1.3%. That said, he expects another wave of price pressures in the second half, similar to last year, as services prices edge higher and core goods momentum firms as inventories fall.
Energy costs pose a more immediate concern. Gas and electricity prices are set to rise 4% in October, and Raja said further increases to dual-fuel bills “can’t be ruled out” heading into 2027 absent a resolution to the Middle East conflict.
On monetary policy, Deutsche Bank’s base case remains for no change to the Bank Rate, though Raja said his conviction “has started to recede in recent weeks” given the combination of higher inflation, rising household inflation expectations, and a stabilizing labor market. Factors that could shift this view include rising 2027 pay settlements, an unresolved Middle East conflict by November, firming food price momentum, and further declines in unemployment.
The economist expects the Bank of England to lower its quantitative tightening envelope to £50 billion from £70 billion, with a further reduction in long bond sales likely.
Attention will also turn to Prime Minister Burnham’s inaugural budget, which Raja views as “the biggest test ahead of year-end.” While expectations for the scale of new spending have narrowed recently, he said the budget could range from £10-20 billion to more than £50 billion in gross additional measures, with market reaction depending heavily on which scenario materializes.