UK Economic Prospects in 2024: A Challenging Road Ahead
Rising inflation, weak GDP growth, and soaring housing costs pose challenges for the UK economy in 2024
As the UK enters an election year, the economy is grappling with numerous challenges that could impact the country’s economic prospects in 2024. Rising inflation, weak GDP growth, and soaring housing costs are among the key issues that policymakers and voters will have to contend with. While Chancellor Rishi Sunak has declared victory on his primary economic target to halve inflation by 2023, experts warn that the UK faces a 50-50 chance of a recession and a decline in living standards. In this article, we delve into five charts that underpin the UK’s economic prospects in 2024.
Falling but stubbornly above-target inflation:
Despite a fall in inflation from over 10% in January 2023 to 3.9% in November, the UK continues to grapple with persistently high inflation rates compared to other G7 countries. Cooling energy prices have contributed to the decline, but the annual rate remains above the government-set target. The Bank of England predicts that inflation will continue to fall in 2024 but will remain above target until the end of 2025. This sustained inflation puts pressure on households, as it means prices are rising, albeit at a slower pace.
Weak GDP growth:
Economic activity in the UK has slowed significantly in recent months, with GDP unexpectedly shrinking in October. Higher living costs have put sustained pressure on households, leading to a slowdown in economic growth. The Bank of England warns of a 50-50 chance of a recession, coinciding with a possible spring general election. Chancellor Sunak has prioritized growing the economy, but the Office for Budget Responsibility (OBR) predicts slower growth in the coming years. The OBR forecasts a growth rate of 0.7% for 2024, which is less than half the average annual growth rate before the 2008 financial crisis.
Rising unemployment:
The combination of weak economic activity and higher borrowing costs is expected to impact employers’ hiring intentions in 2024. Forecasters anticipate a rise in unemployment over the course of the year. Despite historically low levels of joblessness in recent months, the number of job openings has decreased as hiring demand wanes. The OBR projects that unemployment will peak at 1.6 million people (4.6% of the labor force) by the second quarter of 2025, up from the current level of approximately 1.5 million (4.2%). Average annual pay growth is also expected to decline due to weaker hiring demand and cooling inflation.
Tax cuts?
Taxes in the UK are on track to reach the highest sustained levels since the postwar Labour government of 1945-1951, despite Chancellor Jeremy Hunt’s recent tax relief measures. A six-year freeze on income tax thresholds has contributed to this increase. Revenues for the exchequer are projected to reach almost 38% of GDP by 2028-29, significantly higher than the pre-pandemic level. Chancellor Hunt is expected to announce tax cuts before the general election, but his ability to do so is constrained by a commitment to reduce the national debt as a share of the economy within five years.
Soaring housing costs:
The Bank of England’s recent cycle of interest rate rises has led to a surge in housing costs, posing a challenge for homeowners and the mortgage market. With most home loans having fixed rates, the impact of higher costs is felt with a lag. Around half of all mortgages have already repriced since December 2021, and an additional 5 million are expected to be affected by 2026. The Bank estimates that monthly mortgage repayments for typical owner-occupiers will increase by approximately £240, a jump of 39%, between the summer of 2024 and the end of 2026. Landlords have also increased rents or sold properties to offset rising borrowing costs, contributing to the sharpest increase in private sector rents on record.
Conclusion:
As the UK heads into an election year, the economy faces significant challenges that could impact its prospects in 2024. Rising inflation, weak GDP growth, rising unemployment, high taxes, and soaring housing costs are key issues that policymakers must address. While efforts to reduce inflation and stimulate economic growth are underway, the road ahead remains challenging. The outcome of the election and the subsequent policies implemented will play a crucial role in shaping the UK’s economic trajectory in the coming years.