Economy in brief: February 2024

Moderating inflation and meagre growth

The UK economy has been pretty flat over the past couple of years, and only Germany among the G7 is projected to have a weaker growth outlook. But there are some pockets of good news. Consumer inflation has come down more quickly than expected of late – with January’s data unexpectedly holding at 4.0% coming in below the Bank of England’s expectations. The outlook for interest rates is consequently turning: the February decision saw a 3-way split in the MPC vote, with Swati Dhingra voting again for a rate cut (which she last did in August), and the number voting for a rise falling from three to two.

But the newly released labour force survey data from the ONS shows an even tighter labour market, with the unemployment rate at 3.8% and an upward revision to the number out of the labour market due to ill health – now standing at 2.8 million. Vacancies have continued to fall – although the pace of decline has slowed – but wage growth has come in firmer than the Bank and others were expecting at 6.2% – as in fact has the services inflation measure that the Bank is most concerned about. Higher than expected earnings, and lower overall inflation are a double-positive for consumers. And consumer spending does account for two thirds of the economy so positive news there does tend to benefit many, provided the largesse is spent. But companies have been telling us that the ongoing tightness in the labour market compromises investment and growth plans and simply replaces energy price inflation with other costs – a fifth of manufacturers in our ITS say that labour shortages are constraining investment, and a quarter say skilled labour shortages are likely to limit output. And this amidst a fairly weak demand environment, with both private and public sectors taking longer to make decisions.

Overall risks to the growth outlook have nonetheless ameliorated. The outlook for interest rates is more benign in light of both energy and domestically-generated inflation moderating faster than expected. The risks of financial market volatility have likewise abated. But geo-political risks are high in Ukraine and the Middle East, and the many elections taking place globally this year could layer on further risk to the political landscape, commodity prices and supply chains.

Fiscal policy: in search of sustainable growth

There are plenty of growth opportunities out there. There are clear opportunities for leveraging the productivity-enhancing benefit of AI; and the transition to net zero creates a new market opportunity, and a spur for innovation. But huge investment by both public and private actors is needed to grasp these opportunities. Given the ongoing tightness in the labour market, the CBI is pressing for action to support participation in the labour market through tax breaks for private health care provision and the close monitoring of the role out of expanded childcare provision. Private sector investment can be further supported by the expansion of full expensing to cover leased and rented assets and bringing capex within the scope of R&D. And we continue to call for a fully formed plan for the shift to a net zero economy. With public sector net debt at 97.7% of GDP and higher interest rates eroding spending capacity, careful decisions will need to be made to prudently galvanise growth.