Is the UK economy stalling?
13 November 2023
Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.
The UK's economic landscape is becoming increasingly troubled. While other countries and regions are facing up to their own unique challenges, the UK seems to be accumulating a fair few of its own.
One of the biggest worries is inflation, which remains stubbornly high despite recent interest rate hikes. This is further complicated by a tight labour market, which could yet spark a wage-price spiral – the stuff of inflationary nightmares. In essence, the UK economy is exhibiting all the hallmarks of stagflation, the dreaded economic scenario of low growth and rising prices.
That being said, amidst these troubles – and there are many – the UK economy has actually shown surprising resilience in recent months, mirroring a global trend of outperforming initial expectations. But then again, this could be due more to overly pessimistic forecasts attributed to the UK last year than to any genuine strengthening of its economy.
Sluggish growth ahead
The UK domestic economy is expected to grow by just 0.5% in 2023, and without any signs of improvement in key indicators, a stronger showing in 2024 seems unlikely.
We also forecast GDP expansion at no more than 0.4% for 2024. While a recession is probably avoidable, albeit nothing is guaranteed, the margin for error is becoming narrower.
On a brighter note, there is still some hope for continued consumption growth, fuelled by rising wages and a gradual recovery in the labour market (following the disruptions caused by the COVID-19 pandemic). But this could also keep inflation higher for longer, which is a worry for the Bank of England (BoE). As a result, high interest rates may persist until late 2024 before declining significantly.
Headline inflation cools
Headline inflation, which skyrocketed above 11% just a year ago, has been steadily retreating and is now close to 6%. Meanwhile, core inflation, which excludes volatile items like food and energy, has been pretty much flat for nearly a year.
There are also other indications that inflation will continue to ease. As the economy slows, companies may find it more difficult to pass on rising costs to consumers. Moreover, signs of a softening labour market are emerging, with unemployment inching up and job vacancies dwindling. This could lead to slower wage growth, helping to bring inflation down to around the 3% level next year – still above the BoE’s 2% target but better than recent highs.
Outlook hinges on election
With a general election looming – expected sometime in late 2024 – uncertainty reigns over the economic outlook. The opposition Labour Party is currently ahead in the polls, which could lead to a change in government and a new set of policies.
However, given the country's already-high public debt levels, it’s not inconceivable – no matter who is in charge – that higher taxes could be implemented, which could dampen investment and consumer spending, further hampering economic growth.
In summary
The UK economy faces a challenging outlook in 2024, with numerous uncertainties and downside risks.
While much focus will go on the general election, the message for investors is consistent: stay invested, stay diversified and stay focused on your long-term strategy.