UK Economy Set to Escape Hard Landing in Boost for Rishi Sunak

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(Bloomberg) — Britain’s economy probably will avoid a recession in 2024 and strengthen in the second half of the year as consumers benefit from falling inflation and the easing of a lengthy cost-of-living crisis.

In aggregate, the 52 economists surveyed by Bloomberg believe the Treasury and the Bank of England will engineer a soft landing for the economy next year, with growth of 0.3% and a recession averted. 

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If the economy is to decide the outcome of the election, which must be called by January 2025, Prime Minister Rishi Sunak’s best chance is to wait until the summer, judging by forecasts for the year ahead. While those readings signal Britain will join Germany at the bottom of the Group of Seven growth table, next year also is expected to deliver an advance in real incomes for consumers after the worst inflation shock in three decades.

“The outlook is far rosier for 2024 than expected 12 months ago,” said Barret Kupelian, chief economist at the consulting firm PwC.  

No issue matters more to voters than the economy, with polls by YouGov and Ipsos showing concerns about slipping living standards outranking those about health and immigration. The forecasts show the government’s may benefit from waiting until the summer to call a vote.

Sunak and Chancellor of the Exchequer Jeremy Hunt have been laying the groundwork for a growth-enhancing consumer boom, scheduling a budget statement on March 6 to highlight the centerpiece of their agenda.

The starting point for the economy is ugly. Revisions to gross domestic product for the second and third quarters of 2023 suggest the UK may have fallen into recession at the end of this year. Official estimates published on Dec. 22 show the economy shrank 0.1% in the third quarter as consumers tightened their belts. 

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Almost a third of the economists who submitted quarterly forecasts to the Bloomberg survey expect a contraction in the final three months of 2023. That would put the UK in recession under the common definition of two consecutive quarters of negative growth. 

Early 2024 will be touch-and-go as well, according to Dan Hanson, senior UK economist at Bloomberg Economics. The UK will “tread a fine line between stagnation and contraction in the first half,” he said.

The backdrop will improve from the summer. In the second half, growth picks up to 0.2% a quarter in the Bloomberg survey. The outlook is for consumer comes to come to the rescue thanks both to government decisions and good luck, according to Simon French, head of research at Panmure Gordon.

At last month’s Autumn Statement, Hunt announced a 9.8% increase in the minimum wage for those aged 21 and over, an 8.5% increase in the state pension and a 6.7% increase in working age benefits. The up-ratings take effect from April. 

At that point, Deutsche Bank Chief UK Economist Sanjay Raja expects headline inflation to be little more than 2%. For 20 million Britons, it will mean a big, immediate improvement in living standards, French said. 

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By then, 33 million workers will already be benefiting from the 2% cut in National Insurance from January, which Raja estimates “will add nearly £10 billion to disposable incomes in 2024.” 

An improving outlook would help Sunak and Hunt’s argument that they’ve piloted the UK through a difficult patch following the pandemic and war in Ukraine, which sent inflation soaring.

In a budget scheduled for March 6, Hunt is expected to put more money in the pockets of consumers by lopping 1% off income tax, handing households £7 billion ($8.9 billion) a year from April.

Sunak and Hunt may also get lucky. The typical household energy bill is on track to fall 14% from £1,928 a year in January to £1,660 in April, according to Cornwall Insight. Raja estimates energy bills will “cost households £10 billion less than they did in 2023.”

Consumer price inflation is dropping faster than expected, helping the poorest households the most. That trend has shifted the debate about interest rates away from further increases and toward cuts starting from the middle of next year. Investors are pricing in five quarter-point reductions in the key rate, which at 5.25% now is at the highest level since 2008.

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That sentiment alone is a big help to mortgage borrowers, about 20% of whom will have to refinance their loans next year. With markets tilting toward rate cuts, those whose low-cost deals are ending are facing a much less severe hit than analysts had warned of.

“We are back on the path to healthy, sustainable growth,” Hunt said this month after the surprisingly sharp fall in inflation from to 3.9% for November from 4.6% the month before.

Living standards still have some way to go to make up ground lost during the pandemic and cost-of-living crisis, but, for the first time since 2018, households may feel noticeably better off. 

“I expect there will be quite a sizeable increase in real household disposable incomes at the back end of next year,” French said. 

Charles Goodhart, a former BOE ratesetter, is equally optimistic. “My expectation is that 2024 will look very nice because we’re having a reversal of the upsurge in energy prices,” he told the Financial Times in mid-December.

Investors are buying into the positive story. The FTSE 100 jumped in the final weeks of 2023. House prices, so often a determinant of consumer confidence, will continue to tread water next year despite the huge rise in interest rates from 0.1% to 5.25% in the past 24 months, mortgage lenders Halifax and Nationwide both reckon.

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The UK’s resilient labor market will also help. A surge in unemployment, currently at 4.2%, would destabilize the economy but the Bloomberg survey showed that 24 of the 26 economists who provided responses think joblessness will remain below 5% next year.

Households still have some excess savings that were set aside in the pandemic, and “private sector balance sheets are healthy,” said Raja, referring to both households and businesses.

Even so, the outlook remains unusually uncertain. Growth forecasts for 2024 by the economists surveyed range from minus 0.7% to a positive 1.9%, reflecting the risks that remain. 

A flare up of the war in Ukraine or regional expansion of the Israel-Gaza conflict could drive up energy prices once more. Supply chains are at risk of disruption after Houthi rebels attacked commercial shipping in the Red Sea, prompting the US to intervene. 

Hanson said “the main risk is that the economy holds up and inflation proves more stubborn than we expect” so the Bank of England is unable to provide the anticipated stimulus of rate cuts. 

The economists who provided an inflation forecasts for the survey were sanguine, however. The median prediction was 3% and the highest 3.8%. 

—With assistance from Harumi Ichikura, Joel Rinneby and Andrew Atkinson.

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