Some of last year’s economic stories are fading into history, but others continue to shape our lives. We will still see the unfolding impact of high borrowing costs, the dance between central banks and markets, the onward march of AI, the repricing of mortgages and nervousness about geopolitical risks. Given the difficulty of predicting the future, though, the most consequential developments could be those we do not yet expect.
Moderate. The UK economy was stagnant in 2023. And according to the results of the FT’s survey of economists, more of the same is in store for 2024. Inflation is likely to moderate, raising living standards. But the changes won’t be uniform. Those due for a mortgage reset will be left with higher bills while state support for living costs is cut. On the other hand, outright homeowners, pensioners, and low-paid employees (as the living wage rises) will gain the most. However, economic growth is likely to remain muted. Unsurprisingly, the surveyed economists see a boost in investment as the desirable but lacking solution for breaking the cycle of mediocre growth.
Variation. If the UK does outperform economists’ somewhat gloomy expectations, progress could still leave many people behind, according to PwC 2024 outlook. Those most reliant on struggling public services will continue to face hardships. A lot of renters will endure rising housing costs: PwC forecasts that London rents will be 20% higher by the end of the year than they were in March 2020. On the other hand, the National Living Wage increasing to £11.44 from April will help hundreds of thousands of low-paid employees (the Living Wage Foundation currently states that £12 is the minimum required for a decent standard of living). And there is some hope for ‘levelling up’, as Northern Ireland, Wales and Scotland are forecast to be among the five fastest growing regions this year.
How many? If 2023 was the story of hotter than expected inflation and rate hikes, 2024 looks set to be the story of cuts. Markets dialled up their 2024 rate cutting expectations as December wore on, with seven rate cuts priced in as the year drew to a close (taking Bank Rate to 3.5%). A touch of seasonal exuberance, perhaps. They’ve pared bets in the early part of the year but are still indicating five cuts, with the first coming in May. Policymakers are attempting to push back, and will likely continue to do so, wary to loosen financial conditions while the fight against inflation is not yet won. A reminder of which was provided last week by the services PMI: the ‘prices charged’ sub-component of the survey is now up two months in a row.
Good news. The UK’s personal sector deposits rose over the month in November, once again led by a rise in bank deposits. That said, the pace of the increase was below the pre-pandemic rate. Meanwhile, commercial deposits stabilised, albeit at low levels. And people continue to manage their money differently, attracted by higher savings rates they are continuing to move money out of non-interest bearing accounts. Mortgage lending remains much weaker than the pre-Covid norm, with gross lending of £16.6 billion, though there is a steady rise in approvals. Encouragingly, household liquid assets modestly increased, and growth in unsecured lending suggests improving consumer confidence. Meanwhile, the stock of commercial lending picked up further. Those falling expectations for rates may just be providing some support to lending already.
Waves of disruption. Wage hikes, worker shortages, and persistent global supply chain disruptions roiled the UK economy in 2023. While industrial action dipped to a low in November (4% of businesses impacted), only 27% of businesses could source materials and services domestically without hiccups. Domestic issues were compounded by ongoing, though ameliorating, problems with global supply chains. There were also workforce gaps for 9% of businesses, and nearly half of businesses were struggling to meet demand. Though a decline in strike action and labour market easing offer hope, supply chain vulnerabilities remain a key concern for 2024.
Adjusting. In the Bank of England’s Decision Maker Panel survey, firms report slowing price rises, with annual output inflation easing from 6.6% to 5.9% in the three months to December and expected to fall to 4.4% one year ahead. Consumer inflation is also expected to decline to 4% in one year. This comes despite robust wage growth, which stood at 6.9% for the three months to December. Meanwhile interest rate hikes are biting. Firms reported that sales in Q3 2023 were 4%, capital expenditures were 8%, and employment was 1.5% lower as a result of interest rate increases. This trend is expected to continue in 2024.
Hissing. Across the ocean, a headline-grabbing, consensus-busting figure of 216k jobs added in December suggests all is well in the US labour market. So too an unemployment rate that remains at 3.7%. But there’s a gentle hissing sound as it gradually deflates. A separate survey points to falling employment in December, while vacancies continue to drop and quit rates are declining. Elsewhere the employment component of last month’s ISM services survey fell to its lowest level since July 2020. Markets may have pared bets in recent days on the Fed starting to cut rates in March, but they still attach a two-thirds probability to such a move. And are pricing in more than six cuts through the coming year, bringing the rate to below 4%.
Bumpy ride. Meanwhile, euro-area bond markets were mildly rattled by the latest figures on prices. Inflation increased to 2.9% in December, up from 2.4% in November. But economists highlight the base effect associated with German fiscal support for heating bills in the winter of 2022. Central bankers will not be too concerned by one-off statistical glitches, focusing instead on labour market cooling and potentially sticky services inflation. Meanwhile, disappointing output and discouraging PMI figures suggest the months ahead could be tricky for many EU member states. Voters will have a chance to express themselves in the European Parliament elections in the summer.