Economy in brief: December 2023

The economy is resilient, but weak

There are two main themes characterising the UK economy at present. The first is resilience: activity has defied expectations of a recession that were prevalent at the beginning of the year. When considered against the scale of the headwinds that households and businesses have faced – high inflation, continued labour shortages, supply chain pressures and global volatility among them – this in itself is very encouraging. Data over the past month suggest that while these headwinds remain strong, they have probably peaked: the labour market is loosening gradually (albeit subject to uncertainty over the ONS’ data), and CPI inflation has fallen to its lowest in two years.

However, this resilience is only apparent against the benchmark of falling activity, which brings us to the second theme around the economy: weakness. The economy has barely grown over the last one-and-a-half years. Business surveys – including our own – suggest that subdued activity will persist in the near-term. This is consistent with feedback from our members, many of whom are preparing for another tough year ahead.

Growth will remain subdued over 2024…

Our latest economic forecast suggests that these dual themes will persist over the next year. We expect growth to remain underwhelming over 2024, at just 0.8% (up only slightly from the 0.6% expansion expected this year). Notably, the pressures facing the economy are expected to shift. Inflation should continue falling back, supporting real wage growth; but this is set against higher interest rates feeding through more forcefully to household incomes, and a mild increase in unemployment. As a result, household spending is set to remain sluggish next year, holding back economic growth.

Sluggish activity will also weigh on business investment, while tepid real incomes growth will push down on housing investment. This means that total investment in the economy is set to fall by around 4%, which marks a real weak spot for growth over the coming year.

…and an improvement over 2025 masks little change in growth potential

However, we do expect some improvement over 2025, when GDP growth is expected to pick up to 1.6%. Household spending gains a firmer footing, as inflation falls further towards the Bank of England’s 2% target, the labour market stabilises and the drag from higher interest rates does not worsen. Better growth lifts business investment, and a further boost to capex will come from permanent full expensing for capital spending (as announced in November’s Autumn Budget) beyond our forecast horizon.

But while this is a welcome boon for the UK’s longer-term growth prospects, it’s clear that more needs to be done to fully unlock the economy’s growth potential. Despite the faster rise in GDP in 2025, growth remains below its post-financial crisis average, and productivity fails to gain much ground towards its pre-crisis trend. Boosting growth sustainably must be a priority across the political spectrum as we head towards a general election – as outlined in the CBI's Business Manifesto.