Can the UK economy expect a stronger year in 2024?

How has the UK economy fared in 2023?

In one word, poor. The country’s GDP contracted by 0.1% in the third quarter, according to revised official figures published on Friday, after three months of zero growth. There was a 0.3% increase in production in the first three months of 2023.

On the expenditure side, cautious households trimmed their real spending, resulting in a 0.5% reduction in actual expenditures, leading to a considerable increase in disposable income by 10.1%. Business investment, during this period, dropped by 3.2%, which is significantly lower than the previous estimate from the Office for National Statistics.

This decline is to some extent due to high government expenditures and a slowdown in trade flow. Elizabeth Martinez at HSBC said, “Clearly, the UK economy is struggling under the weight of higher costs and higher interest rates, and business investment, a little better a few quarters ago, is now notably dismal.”

Weak production growth indicates that achieving strong and sustainable growth in the country is not likely anytime soon. According to the published government figures last month, production capacity, which is essential for the standard of living, is almost flat since 2007.

What about recent data?

In October, there was a 0.3% reduction in production, raising concerns that if a decline continues in the overall fourth quarter, the UK is at risk of entering a technical recession. However, some more recent figures tell a slightly more encouraging story.

Between October and November, retail sales exceeded expectations, showing an increase of more than 1.3%, the fastest growth after January. Meanwhile, the Black Friday sales boost expanded with substantial volumes of sales in food, households, online, and fuel stores, contributing to increased consumer spending. According to RSM UK’s economic expert Thomas Page, “The reality is that retail sales were robust across the board, and many surveys suggest that the economy continued some growth in the last quarter of the year.”

In December, the S&P Purchasing Managers’ Index, a gauge of private sector activity, reached its highest level in six months, indicating a robust recovery in the services sector.

Is inflation helping?

Yes, it is an important factor for those expecting better economic performance in the coming months. In November, the inflation rate jumped above the expected 3.9% to 4%, which is the lowest level since September 2021.

With an increase in prices accompanied by softening in wages since October, real regular earnings saw an annual increase of 1.4%, surpassing the 1.3% increase in the previous three months. Real earnings were falling until June.

Economists expect that if income continues to increase, households will eventually start spending more. Many anticipate that the expansion of real earnings and a reduction in the rate of national insurance, which applies in January, will support income in January.

There are some signs in the confidence numbers that paint a better picture. According to GfK’s survey, consumer confidence reached its highest level in three months in December, aided by consecutive monthly increases in real earnings.

Martin Beck, chief economist adviser at consultancy EY ITEM Club, said, “The expected easing in inflation and interest rates, sooner and more pronounced than anticipated, will boost consumer spending in the coming months.”

What about interest rates?

The Bank of England plays a significant role in this economic story. Expenses related to taking out loans with the highest government rate of 5.25% are the most significant threat to expectations of recovery in household spending.

However, with consecutive months of unexpectedly high inflation in excess of gold and continuous softening in excess of gold, markets indicate that the central bank will begin reducing interest rates in the first six months of next year, reducing pressure on mortgage holders.

Investors now expect the BoE to reduce rates from the current 5.25% to 3.75% by the end of 2024.

The possibility of low government rates has already begun in the housing market. Rates on popular mortgages hit the highest level since June at 15 years, reducing pressure on those households that need to refinance or sign new loans at lower rates. According to the figures published by the BoE last month, the lower mortgage rate pushed up approvals for mortgages in October to their highest level in three months.

Providing mortgages nationwide, Nationwide and Halifax, according to figures, have benefited from reduced pressure on homebuyers in November, helping them recover some of their losses. The ONS has reported that house prices in October fell at the fastest annual rate in more than a decade, but the figures are based on transactions that may have taken place many months ago, and they do not reflect the latest improvements.

Martinez said, “With falling inflation and favorable financial conditions, we are hoping for a pleasant economic new year.”