The trade credit and surety arm of insurance giant Allianz has said the UK economy is set to grow but there are headwinds ahead with a likely round of tax increases in 2026 and 2027.

It said its analysis had found  the UK economy is picking up momentum from a weak 2023. This acceleration reflects catch up effects and is being buoyed up by looser financial conditions, despite still elevated interest rates. Financial institutions are loosening their credit standards in anticipation of further Bank of England (BoE) rate cuts.

It added: “Earlier this year, we predicted the Bank of England (BoE)would gradually reduce interest rates through 2024 and into 2025 to a terminal base rate of 3.25%. We now predict that will fall further to a terminal rate of 3% by August 2025, delivering cautious 25bps rate cuts in each meeting from November 2024.”

Maxime Darmet, senior economist for the UK, US and France, Allianz Trade, said: “With an economy displaying solid momentum, inflation set to pick up again in coming months, and financial conditions loosening in areas such as the housing market, the BoE is in no rush to loosen policy.

“In fact, the BoE is expected to move in lockstep with the Fed, delivering cautious 25bps rate cuts in each meeting from November. A steady loosening from the Fed and the ECB and a drop back in inflation expected by the spring of 2025 should give the BoE enough confidence to cut rates by 25bps in each meeting through August 2025.”

The insurer said the backdrop of inflation has improved. While it should pick back up slightly by the end of 2024 for technical reasons, underlying price pressures are clearly easing. This will allow the BoE to accelerate the pace of rate cuts heading into 2025. Nevertheless, where interest rates settle will be at a level way above the pre-pandemic level.

Darmet added: “The UK’s growth momentum should continue to be solid heading into 2025. The UK posted solid quarterly growth rates in H1 2024, buoyed by the early signs of a recovery in residential investment and strong public spending. We expect the recovery of the housing market to continue through 2025. Mortgage approvals are almost back to their pre-pandemic levels and real house prices are accelerating. Lower inflation, still elevated wage growth and a tight labour market should increasingly support household spending.

“We expect the fiscal stance to be slightly expansionary in 2025, with tax hikes partially funding increased public spending on infrastructure, for example, which has a strong GDP impact. Nevertheless, tax hikes announced in the upcoming budget may weigh on consumer confidence. Meanwhile, exports should recover heading into 2025, helped by stronger growth in the Eurozone.”

He added however while this month’s budget, the first from a labour government in 14 years will see peripheral taxes increased and some tax breaks removed given the pledge not to increase income tax, VAT and national insurance rates there will be a different story in 2026 and 2027 where Darmet said it is likely tax rates will increase as the UK seeks to reduce its deficit.

He added that the upcoming US election result may have profound impacts foe the UK Europe and the world with both candidates looking at more insular policies to drove US based investment and look to secure the world’s biggest economy.