The UK faced a challenging 2023 with rising prices, stagnant incomes, and sluggish growth, raising recession fears. But with inflation easing before Christmas, will 2024, a likely election year, bring economic relief? Crucially, how does the UK’s economic performance stack up against its European neighbors?
Inflation: Cooling Down but Still Higher Than EU Average
While the cost-of-living crisis appears to be easing, UK inflation remained at 3.9% in November, matching France but exceeding the EU average of 3.1%. This contrasts with lower inflation in the US. The UK’s persistent inflation stemmed from the double whammy of the Ukraine war’s impact on energy and food prices, and post-pandemic labor shortages. However, as these pressures subside, the inflation gap with Europe is narrowing. Core inflation, excluding food and energy, has also been stickier in the UK, indicating stronger consumer spending, potentially fueled by pay increases or pandemic savings. This too is starting to moderate.
Interest Rates: Potential for Cuts in 2024
The Bank of England’s aggressive interest rate hikes might be over, but the impact persists. While many countries saw rising central bank rates and mortgage costs, the effects vary. In the US and parts of Europe, longer-term fixed-rate mortgages and flexible switching options provide some insulation from rate increases. France even benefits from government rate caps. In contrast, the UK’s prevalence of shorter-term fixed-rate deals exposes borrowers to fluctuating rates. Millions have already faced higher repayments, with more to come in 2024. However, sustained lower inflation could prompt the Bank of England to cut rates as early as spring, aligning with other central banks. This prospect is already reflected in falling fixed-rate mortgage deals.
Economic Growth: Stagnation and Recession Risks
Revised data revealed the UK economy surpassed its pre-pandemic size, although still trailing the US and slightly behind France. However, recent performance has been lackluster, with the economy stalling and potentially slipping into recession in late 2023. The service sector, particularly those catering to households, remains below pre-pandemic levels. The Bank of England forecasts minimal growth over the next two years, with the IMF offering a slightly more optimistic outlook. Long-term growth concerns persist, with the UK lagging behind its competitors over the past 15 years. This underperformance translates to a significant financial disadvantage for the average British household, emphasizing the need for policies promoting stronger economic growth.
Unemployment: Resilience Amidst Emerging Challenges
Despite economic turbulence, the UK’s job market has remained resilient, with a 4.2% unemployment rate aligning with the G7 average. While higher than Germany and the US, it’s lower than France’s 7%. However, skill shortages have eased, and rising interest rates are curbing hiring. Unemployment could rise modestly, potentially impacting over 100,000 jobs. Furthermore, a concerning rise in economic inactivity, particularly long-term sickness, poses a challenge. Addressing this issue is crucial for boosting growth and incomes, with the government implementing various measures, from occupational health support to benefit sanctions.
Tax Burden: Record Highs Despite Cuts
While a National Insurance cut offers relief to some, frozen tax thresholds mean increased tax bills for many as wages fail to keep pace with inflation. Consequently, the UK’s tax burden is projected to reach a post-war high. Despite this, the UK’s tax burden remains below the EU average, although higher than the US. France, for example, has a significantly higher tax burden. Most nations face mounting pressure on public finances due to aging populations and existing debt.
Conclusion: A Mixed Outlook for the UK Economy
As the UK enters 2024, the economic outlook presents a mixed picture. Easing inflation offers some hope, but challenges remain in terms of growth, interest rates, and employment. The upcoming election will likely focus on these economic issues, with political parties vying to present solutions for boosting prosperity and addressing the cost-of-living challenges faced by many households. The UK’s economic performance relative to Europe will undoubtedly play a crucial role in shaping the political and economic landscape in the coming year.
