Economy in brief: April 2024

Headwinds buffeting the UK economy are receding

As the winter gradually makes way for spring, so recessionary conditions are giving way to somewhat better activity across the private sector. Various headwinds to growth are receding, and some more quickly than expected. Energy price inflation has moderated sharply: the system average gas price was down a third in March on its October level, as a mild winter supported high gas stock levels in Europe. Food price inflation has likewise fallen back from its 45 year high of 19.1% in March 2023 to 5.0% in February 2024, reflecting lower commodity and energy prices. These developments have supported a faster-than-expected decline in consumer inflation, which reached 3.4% in February and the Bank of England expects inflation to drop briefly below 2% in Q2. This is in turn supporting household buying power: whole economy regular pay has been growing faster than inflation for eight months. Lower inflation outturns have likewise led markets to expect the first interest rate cut in the UK in June, which will ease cost pressures on households and businesses. Meanwhile supply chains have proved more resilient than expected to the escalation of conflict in the Middle East – companies tell us that pandemic-related disruption led to significant investment in supply chain resilience with approaches including near-shoring, ally-shoring, the expansion of data analytics and diversification. All welcome developments.

Sector performance has been variable

The UK economy had recovered its pre-pandemic level by Autumn 2021, and managed growth of 4.3% in 2022, but then only managed meagre growth of 0.1% in 2023. These growth rates mask significant differences in performance at sector level, both since the pandemic and last year. Transport and retail are the lead underperformers since the pandemic – with output lower than 2019 levels by 2% and 16% respectively. Retail has struggled as high goods inflation and then high interest rates have eroded demand, while rail travel has struggled to recover even while air travel has picked up sharply. Information and communications remains the stand-out high performer, with output 24% above pre-pandemic levels. Despite tribulations in the sector over the past year, pandemic demand for equipment has given way to AI-fuelled demand, enabling the sector to continue to grow in 2023. Within manufacturing, food, textiles, basic pharma and computers have been the high performers.

The key reflection here is the sheer quantity of structural and cyclical economic developments playing out. Post-pandemic demand adjustments (demand for goods and retail giving way to demand for hospitality and leisure), changing inflation dynamics (pandemic-related supply chain disruption giving way to energy price inflation), complex labour market conditions (differential skill and labour shortages), rising (and soon to be falling) interest rates, softer growth, ongoing supply chain pressures, AI emergence, ongoing advances in healthcare, and the increasing impact of emerging economies on global economic conditions: these are all complicating the formation of a solid view of the outlook for the UK. But to return to the opening premise, on the whole, the outlook is brightening.