OE has raised its 2024 GDP forecast with growth of 0.6% now predicted for the year, up from 0.4% last month. Consumers are expected to lead the recovery in the next two years, buoyed by improving real household incomes as the rate of inflation falls. The recent Budget’s cut to National Insurance Contributions (NICs) should also give a small but short-lived boost to household spending power. Meanwhile, the gradual easing of monetary policy will also contribute to growth, though the lagged impact of previous interest rate rises will still weigh on households this year.
Economic Growth
GDP rose by 0.3% month on month in January (up from the initial 0.2% estimate) and by a further 0.1% in February, reversing most of the falls of late 2023. While businesses still face challenges and increased costs – including the National Living Wage rise – business surveys point to continued pick-up in investment and sentiment. OE forecasts the economy will leave recession in Q1 2024 with growth of 0.4% (although official confirmation from the ONS won't be available until May).
Inflation
According to the ONS, the largest downward contributions to the monthly change in annual CPI inflation rates came from food, while the largest upward contributions came from motor fuels. The pace of annual food price hikes has been easing in recent months, dropping from a peak of 19.2% in March 2023 (the highest in over 45 years) to 4% in March.
Unemployment
According to the ONS’s Labour Force Survey, employment growth has slowed over the last 12 months, while the proportion of people economically inactive has increased. Of particular note, historically high numbers of people across all age groups are reporting that they are long-term sick.
Earnings
From December to February, average total earnings grew by 5.6% and regular earnings (excluding bonuses) by 6%. After inflation, total earnings rose by 1.6% in the three months to February.
Key Drivers of the Short-term Outlook
- Inflation will fall sharply.
- The Bank Rate will end the year at 4.5%.
- The impact of tighter monetary policy will continue to emerge.
- Fiscal policy will tighten.
- House prices will fall only slightly, despite being significantly overvalued.
What to Watch Out For
- The impact of the Israel-Hamas war
- Changes to fiscal approach
- Corporate insolvencies
- Consumers spending their pandemic savings
Produced by the Foresight Factory for the IPA Commercial Group
