The UK should see economic momentum build in 2024

Joint With Hywel Ball , EY UK Chair and UK&I Managing Partner, Ernst & Young LLP.

As we enter a new year, it’s natural that we start to look for signs of that (much-used term) ‘green shoots’ of recovery. These are few and far between, but there are some. While recent data (particularly December's retail sales) suggests that the UK economy could have experienced a mild technical recession in the second half of 2023, there are some genuine reasons to be (slightly) more positive about prospects for 2024.

This time last year, the consensus was that the UK economy would face a recession in 2023 (indeed, the EY ITEM Club’s January 2023 forecast for a contraction of -0.7% for 2023 was slightly more optimistic than the consensus at that time). The economy very much surprised to the upside, posting some robust growth figures in the first half of the year, and whilst activity slowed again in H2, growth for 2023 as a whole is likely to be 0.3% even if it did slip into recession towards the end of the year. This is pretty consistent with what the major European economies appear to have achieved in aggregate – and likely to be much better than some EU member states, for example, Germany, where GDP fell last year.

There have also been recent signs of improving business and consumer confidence in the UK. However, both are more subdued across the EU; therefore, it may be time to start re-pricing the UK economy relative to its peers.

Looking ahead to this year, several tailwinds should support a recovering economy. In particular, the forces that drove the surge in inflation – supply chain constraints and energy market shocks – are receding, with CPI inflation expected to fall to the 2% target by late spring. This will alleviate pressure on business margins and, of course, on consumers, particularly as wage rises are likely to remain robust in the face of a cooler labour market. This should provide a platform for consumer spending to rise by 0.9% this year, which should help consumer-facing businesses and (non-food) retailers, in particular, who have had a challenging few months.

With inflation under control, the Bank of England should be confident to cut rates. The EY ITEM Club now expects 125 basis points of interest rate cuts this year – with the first cut expected in May (if not earlier). This will relieve pressure on mortgage holders and, importantly, lower the cost of corporate borrowing, which contracted for much of 2023 and so, in turn, will support business investment. We should also start to see some recovery in deal markets, which have been subdued for the last 18 months or so due to uncertainty around (and the upward trajectory of) the cost of debt. Finally, falling inflation and lower debt service costs will ease some of the pressures on government finances, leaving scope for pre-election giveaways in the 6 March budget to accompany the already significant measures taken in the Autumn Statement on pensions, benefits, national insurance and the minimum wage.

In this context, the EY ITEM Club has upgraded its forecast for GDP growth in 2024 to 0.9% (up from 0.7% in the autumn) and 1.8% in 2025 (up from 1.7%).

By the end of the year, a new government may well have inherited an economy returning to more ‘normal’ historical levels of growth and perhaps providing further fiscal headroom for more in the way of tax cuts or additional spending to address the accumulating challenges across the public sector.

However, the optimism does need to be tinged with caution. There are still some considerable downside risks to this outlook. Low unemployment leading to higher wages could cause persistent inflation, central banks may be cautious about rates, whilst geopolitics will remain volatile, with over half the globe’s population going to the polls this year. Therefore, although there is general optimism that the UK and, indeed, global economies will achieve a ‘soft landing’ through 2024 – the uncertainty and volatility will remain, and businesses and households should plan accordingly.

Read the full report: www.ey.com/uk/ITEM .