The UK economy has battled sluggish growth for years. Though shocks such as the pandemic and the cost-of-living crisis take a large share of the blame, questions remain regarding the country’s economic fundamentals. Still, signs are emerging that the economy has already hit the depths of the current economic cycle and is, therefore, now on the path to recovery.
Recent data releases have shown that the UK economy faced some turbulence in the latter half of 2023. Notably, Q3 GDP was revised downwards, with output now estimated to have contracted by 0.1% on a quarterly basis. This represented the first output contraction since Q3 2022 and placed the economy at risk of entering a recession.
Meanwhile, though inflation slowed sharply in the months of October and November, a surprise uptick was witnessed in December, with price growth still standing at twice the Bank of England’s 2.0% target. Such elevated rates have constrained consumer spending. One recent manifestation of this was the festive period. December, the key month of the retail calendar, saw dire sales figures, with volumes falling by 3.2% and reaching their lowest level since 2018. Though factors such as the shift towards greater festive spending in November, the ‘timing’ of Christmas in 2023, and issues with seasonal adjustment may have been at play to some extent, a likely explanation is that consumers took the festive period as an opportunity to economise on their outgoings, having faced a prolonged period of pressure from heightened prices.
Though generally painting a pessimistic picture, these recent data points do bring the mild silver lining that the worst may well have passed. Indeed, Cebr expects this to be the case. We anticipate a technical recession to have prevailed in the latter half of 2023, with Q4 thus marking the nadir of the cycle.
From here, a gradual recovery is forecasted into 2024, driven primarily by growth in real disposable incomes and the ensuing impact on consumption. There is scope for this to be supported further if the Chancellor takes steps to implement expansionary and targeted fiscal policy at the upcoming Spring Budget. There will also be a base effect to consider, given the anticipated contractions across the latter half of 2023.
Nevertheless, 2024’s trajectory is expected to be relatively weak, reflecting the impact of ongoing macroeconomic headwinds. A key headwind is the monetary policy environment, with interest rates currently standing at their highest level in over 15 years.
Though December’s inflation uptick will have been an unpleasant surprise for policymakers, elevated interest rates have largely helped to suppress inflation and this is expected to continue for much of 2024. Particular downward pressure is anticipated from April, when the Ofgem price cap is set to be lowered significantly. The Bank of England’s policy stance is expected to adjust shortly afterwards, with Cebr pencilling in a first rate cut in May. In our central scenario, we are expecting a series of further cuts, bringing the base rate down to 3.75% by the end of the year.
There remain some risks to the inflation outlook, however, which may reduce the extent to which rates are cut this year. Labour market effects likely pose the biggest constraint, with elevated wage growth bringing the prospect of second-round inflation effects. International supply chain factors, such as those emerging from trade disruption in the Red Sea, could also be influential, while unexpected exogenous shocks could further impact the inflation trajectory and those of other macroeconomic variables.
Ultimately, Cebr expects the economy to show slightly stronger growth in 2024, relative to 2023. Growth is expected to fall firmly below the long-term trend rate, however, marking another year of relatively poor performance. Such performance is highlighted when comparing current trends with those that were expected to prevail prior to the pandemic. For instance, Cebr projects the economy to be around 5% smaller in 2024 that it would have been if pre-Covid growth trends had prevailed.
There is ongoing debate surrounding exactly how the UK can escape this rut of weak growth. With an election on the horizon, some are hopeful that a change of government will be a solution. However, given the relatively narrow gap between the policy stance of the country’s two main parties, practical changes between governments are likely to be less drastic than in previous instances. As such, this alone is likely to prove insufficient to drive stronger economic performance. Instead, addressing some of the UK’s more fundamental problems, such as weak productivity growth and elevated inactivity, will be a significant step to unlocking stronger output growth. This will likely require more substantial policy action than that proposed by either of the parties capable of leading the next administration.
For more information contact:
Sam Miley, Managing Economist & Forecasting Lead
Email: firstname.lastname@example.org, Phone: 020 7324 2874
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.