OE has held its 2024 GDP forecast steady with growth of 0.9% predicted for the year. Consumers are expected to lead the recovery in the next two years, buoyed by improving real household incomes as the rate of inflation falls. 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 a stronger-than-anticipated 0.6% in Q1 2024. This positive start to the year was driven by growth in the services and production sectors and strong household spending boosted by the earlier-than-usual Easter. With spending brought forward, however, output in consumer-facing sectors shrank in April, contributing to flat monthly GDP growth overall. Despite this, business survey data suggest continued momentum in the economy, likely dampened somewhat by planned junior doctors strikes in June. OE expects a more moderate quarterly growth figure of 0.4% in Q2.
Inflation
According to the ONS, the easing of the rate of inflation reflects price changes for food and non-alcoholic beverages. The largest upward contributions came from motor fuels. Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.5% in the 12 months to May 2024, down from 3.9% in April.
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 February to April, average total earnings grew by 5.9% and regular earnings (excluding bonuses) by 6%. After inflation, total earnings rose by 1.2% in the three months to February.
Key Drivers of the Short-term Outlook
- Inflation will remain close to the Bank's 2% target during H2 2024.
- The Bank Rate will end the year at 4.75%.
- 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
- Middle East escalation
- Higher for longer interest rates
- Increased China-Taiwan tensions
- Central banks signal victory over inflation
UK Election Focus - uncertainty surrounds economic future
The general election introduces uncertainty to the economic outlook. The next government will inherit plans for a severe tightening of fiscal policy throughout the next parliament via a combination of tax rises (with most tax thresholds being frozen until 2028) and implied real-terms cuts in public spending. The Labour party, which current polling suggests is likely to form the next government, has generally committed to maintaining this restrictive fiscal approach. The party's manifesto pledges no increases in income tax, National Insurance, VAT, or corporation tax, highlighting that the tax burden has reached a 70-year high under the Conservative government. It also commits to ensuring that debt as a share of the economy is reduced by the end of the next parliament, with implications for spending on government departments. As a result, the party will have very little room, under current plans, to significantly boost investment in public services – a key element of Labour’s pledge to the country. What’s more, the UK’s demographic outlook is characterized by an aging population, placing further pressure on national finances. One topic that’s often seen to be uppermost in the minds of British voters is the future of the country’s National Health Service. As we explore in our Health Horizons macro driver, the rising cost of healthcare is a topic that governments around the world will have to increasingly grapple with in years to come.
Labour emphasizes its ability to deliver robust economic growth, which would benefit government finances. However, the Institute for Fiscal Studies (IFS) questions the extent to which significant levels of growth are achievable or would enhance public coffers, and criticizes Labour, along with the Conservatives and the Liberal Democrats, for perpetuating “a conspiracy of silence on the difficulties they would face” in generating the necessary money to finance their plans. OE expects that once in power, Labour is likely to be bolder, potentially increasing taxes to create room for more spending on public services. As a result, while the fiscal outlook remains restrictive, uncertainty persists.
Produced by the Foresight Factory for the IPA Commercial Group
