Geopolitics allowing, we may well experience a year of macroeconomic improvement, featuring rising real incomes and falling interest rates. But the journey will feel like shuffling forward, week by week, with various indicators telling gradual and complicated stories, some positive but with inevitable setbacks. We will learn on Wednesday, for instance, whether inflation has continued to fall. But a palpable sense of broad prosperity will only emerge if there is cumulative good news in the months ahead.

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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.

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Just as economists started winding down – this newsletter will see you again in 2024 – central banking delivered a touch of drama to interrupt the Christmas lunches. US monetary stance softening made waves in markets and introduced a new phase in the divergence between American and European macroeconomic realities. Although the UK’s disappointing GDP update was counterbalanced by rising consumer confidence, Britain approaches the new year in a more fragile position than our friends across the ocean.

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UK, US, and Eurozone central banks will announce the year’s final policy interest rates this week, most likely holding steady. They want to see further evidence of disinflation and labour markets cooling – and to assess the lagged impact of monetary tightening. Price stability may be at the top of central bankers’ Christmas wish lists, but economists generally will also be asking for decent productivity growth, uninterrupted global supply chains and progress on decarbonisation in the months and years ahead.

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When it’s cold and dark, we naturally look forward to the warmth and light of festivities ahead. For the UK economy, we can with reasonable confidence anticipate some future vantage point from which we will be able to look back on the difficult recent period of inflation and monetary tightening. The next official statistics on inflation will likely show gradual progress. Confidence about other outcomes, though, notably long-term productivity growth and global decarbonisation, can feel more like a leap of faith.

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Updates last week from the Chancellor and the fiscal watchdog, the OBR, took a lot of digesting. As the Autumn Statement headlines and Thanksgiving sales fade away, for many of us the key financial figures to watch will be heating bills and Christmas shopping receipts. The big picture for the UK is an economy hobbling along under the shadow of high interest rates, though with a sense of relief that we have so far avoided a recession.

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On the UK economy, take your pick. Pessimists emphasise stagnation, high inflation, and a weakening labour market, while optimists see resilience, gradual disinflation and signs that monetary policy is working. But in the background is an uncomfortable feeling that we have grown used to low expectations. Headlines this week will likely announce a fall in inflation, boosting the national mood, but we will need further good news to feel confident of a better future.

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Having spent most of 2022 and 2023 hiking interest rates, the central banks in London, Washington and Frankfurt are now taking a breather and scanning the horizon. Uncertainties abound. How much of the impact of raising rates has materialised? How are workers, firms and consumers behaving? Monetary policymakers, having been wrong-footed by inflation, are keen to avoid appearing complacent. Talk of cutting rates is firmly dismissed, but markets expect cuts in 2024. Though inflation should ease, steering the economy could get even harder.

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While the US appears to be enjoying ‘immaculate disinflation’, moving beyond price pressures without suffering a recession, indicators in the UK are less encouraging. Business activity seems to be contracting and unemployment inching up. Pessimism could be premature, though. Statistical difficulties are making it harder to follow these developments, and the economy also has some positive stories to tell. The Bank of England interest rate decision and inflation forecast this week will help shape the mood as winter approaches.

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Inflation is still running at more than three times the 2% Bank of England target, interest rates are biting, and consumer confidence has fallen, perhaps in response to the emergence of new geopolitical turmoil. While there is optimism that inflation will decline in the months ahead, the Bank of England is watching closely for signs of domestically generated price pressures. And like the rest of us they nervously follow headlines from the Middle East.

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