UK Economy Faces Challenges as Election Year Approaches
Inflation, GDP Growth, Unemployment, Taxes, and Housing Costs Underpin the UK’s Economic Prospects in 2024
As the UK enters an election year, the economy is grappling with various challenges that could impact the nation’s economic prospects in 2024. Rising borrowing costs, higher taxes, and elevated living expenses have put pressure on households and businesses, while the Bank of England warns of a 50-50 chance of a recession. In this article, we will explore five key charts that underpin the UK’s economic outlook for the coming year, including inflation, GDP growth, unemployment, taxes, and housing costs.
Falling but stubbornly above-target inflation:
Despite a decline in inflation from over 10% in January 2023 to 3.9% in November, the UK continues to face persistently higher levels of inflation compared to other G7 countries. While inflation is expected to continue falling in 2024, the Bank of England predicts that it will remain above the government-set target until the end of 2025. This puts continued pressure on households, as lower inflation does not necessarily mean prices are decreasing, only that they are rising at a slower pace.
Weak GDP growth:
Economic activity has slowed significantly in recent months, with the GDP unexpectedly shrinking in October. Higher living costs have placed sustained pressure on households, and the Bank of England warns of a 50-50 chance of a recession, potentially coinciding with a spring general election. Chancellor Rishi Sunak has made growing the economy a top priority, but the Office for Budget Responsibility (OBR) expects slower growth in the coming years. The OBR forecasts a growth rate of 0.7% for 2024, less than half the average annual growth rate between 1998 and 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, leading to a rise in unemployment. Despite historically low levels of joblessness in recent months, the number of job openings has decreased as hiring demand fades. The OBR forecasts that unemployment will peak at 1.6 million people (4.6% of the labor force) by the second quarter of 2025, compared to the current level of about 1.5 million (4.2%). Average annual pay growth is also expected to decline to around 3.7% in 2024 and 2.2% in 2025.
Tax cuts?
Taxes as a share of the UK’s economy are on track to reach the highest sustained levels since the postwar Labour government of Clement Attlee (1945-1951). Despite Chancellor Jeremy Hunt’s efforts to cut national insurance and offer tax relief on business investment, revenues for the exchequer are projected to reach almost 38% of GDP by 2028-29, significantly higher than the pre-pandemic level of about 33%. Hunt is expected to announce tax cuts before the general election, but he 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 aggressive cycle of interest rate rises has led to a surge in housing costs, creating challenges in the mortgage market. With most home loans having fixed rates, the impact of higher costs is felt with a lag. Approximately half of all mortgages have repriced since December 2021, and an additional 5 million are expected to be affected by 2026. The Bank predicts that for the typical owner-occupier transitioning from a fixed rate between the summer of 2024 and the end of 2026, monthly repayments will increase by about £240, a jump of approximately 39%. Landlords have also increased rents or sold properties to offset their own rising borrowing costs, contributing to the sharpest increase in private sector rents on record.
Conclusion:
As the UK enters an election year, the economy faces significant challenges that could impact its prospects in 2024. Stubbornly above-target inflation, weak GDP growth, rising unemployment, high taxes, and soaring housing costs all pose hurdles for households and businesses. Chancellor Rishi Sunak’s goal of halving inflation by 2023 may be achieved, but the Bank of England warns of a potential recession. The outcome of the election and the government’s economic policies will play a crucial role in shaping the UK’s economic future.