Economy in brief: January 2024

No New Year cheer for the UK’s growth outlook

A fair amount of data has come out in recent weeks, adding to a raft of speculation regarding the outlook for the UK economy. GDP was revised down by 0.1% pts in Q3 to

-0.1% garnering much speculation regarding the risk of a technical recession should growth disappoint in Q4. The CBI’s latest survey data suggests that momentum improved in the three months to December, but nonetheless remained in negative territory. The improvement was led by consumer services and manufacturing, with retail’s December performance worsening on November’s. The narrative from companies around the UK from the CBI’s final round of quarterly regional council meetings in 2023 reiterated the weak growth story, albeit with pockets of strong demand in healthcare, management consulting and aerospace.

On the inflation front, official inflation data came in better than expected at 3.9%, driven down by most components of inflation, but particularly transport and recreation and culture. Importantly, services inflation came down as well to 6.3% from 6.6%. This underlines the challenge, however: while headline inflation is being driven down by lower energy prices relative to a year, underlying inflation is sticky and will be harder to bring down. CBI wage expectations from across the private sector for the next twelve months range from 3.6% in distribution to 4.7% in services and manufacturing, which, when compared against stagnant productivity doesn’t seem consistent with further falls in core inflation.

What could shift the dial on growth this year?

Forecasters have had a fair amount of flack in recent years for the extent of their forecast errors, a lot of which is down to the sheer number and scale of the shocks that the economy has experienced – financial crisis, EU exit, pandemic and war, for instance. Forecasts are based on assumptions and past behaviour, so it’s worth looking at what the growth outlook might be with different assumptions.

Starting with what could cause growth to be worse than expected, we have the disruption to shipping in the Suez canal. We’re already receiving anecdote from members that shipping diversions around the Cape add two weeks to shipping times and may add anything from 10% to 100% to shipping costs. Recalling the experience from the pandemic this could feed back through to goods inflation, leading to higher global interest rates over the year ahead. The labour market in the UK is particularly difficult to forecast at the moment, given the withdrawal of the official data by the ONS and an incomplete understanding of the drivers behind lower labour market participation since the pandemic. If more people return to the workforce this year than expected – perhaps if average health in the population improves or the depletion of pandemic-amassed savings pushes people to seek employment again – we could see greater competition for jobs, lower wage inflation and lower overall inflation, driving down interest rates quicker but driving up unemployment too. And there’s an autumn election to consider as well. Let’s hope for more good news than bad.