The Saturday Economist ... U.K Prospects for 2024 ...

It is possible a reduction in income tax and inheritance tax rates could feature in the budget but will it be enough to turn the fortunes of the Tory Party around? In this update we outline our forecasts for 2024. The economy may be flat lining but modest growth is in prospect never the less ...

Economic Growth ...
The UK economy returned to growth in November, aided by a better month for services manufacturing and construction.

Gross domestic product expanded by 0.3 per cent in November, compared to a 0.3 per cent contraction in the previous month, according to the Office for National Statistics.

The year on year comparison was growth of 0.2%. For the year as a whole, growth was up by 0.6% in the eleven months to date

GDP growth in 2023 is expected to out turn at around 0.6%. Construction output increasing by 3%, manufacturing output increasing by 1%. Service sector growth up by just under 1%, with a mixed performance across sectors and quarters.

So what of 2024?
The Office for Budget Responsibility forecasts growth of 0.7% for 2024. The OECD forecasts U.K. GDP to grow by 0.7% in 2024. The UK Treasury summary of forecasts for the UK economy averages growth of 0.7% in 2024. The Bank of England assumes zero growth this year. (Why so gloomy?)

Our scenario forecast would anticipate growth of 0.5% to 0.7% in 2024. We model growth at 0.6% in 2023 and 0.7% in 2024.

Inflation and Interest Rates ...
Inflation CPI basis fell to 3.9% in November from 4.6% prior month. The surprise drop in inflation, larger than expected, is raising expectations of interest rate cuts sooner than the Bank of England has suggested, pushing gilt yields lower. Mortgage rates have fallen. Markets now anticipate the Bank will start to cut rates in the first quarter of 2024, with rates falling to 4 per cent by the end of the year.

We remain slightly more cautious. The fall in headline inflation is welcome, flattered as it is by very low goods inflation. In detail, inflation CPI basis eased to 3.9% in November from 4.6% in October. CPI(g) goods inflation moved to 2.0% from 2.9% prior month. CPI(s) Service Sector inflation moved to 6.3% from 6.6%. Core inflation eased to 5.1% from 5.7%.

The Bank will remain cautious and quite rightly so. Food price inflation remains high at 9.2%. Earnings remain high at 7.2%. Service sector inflation remains high at 6.0%. Core inflation remains high at 5.1%. As governor Bailey has suggested, "There is still some way to go in Britain's inflation fight".

Our outlook remains unchanged. Inflation trends are on the right track. Producer prices are in negative territory. Oil prices remain subdued. Further progress must be seen in food, earnings, service sector prices and core inflation before rate cuts will be tabled.

The Bank may just be able to offer a rate cut in the late Spring. April or May remains a possibility. It will be a close run thing.

Our base line scenario is inflation CPI basis will end the year around the 3.5% level. All things being equal, base rates could end the year at around the 4.5% level.

We assume oil prices will remain subdued throughout the year. The Houthi crisis in the Red Sea will be normalized at some stage.

Unemployment ...
The forecast for the UK unemployment rate in 2024 varies slightly among sources, but there is a consensus that it is expected to rise compared to the current levels. According to the Office for Budget Responsibility (OBR), the unemployment rate is projected to peak at 4.6% of the labour force, up from the current level of about 4.2%.

Our scenario forecasts would assume a slight increase in unemployment from current levels but not by much, possibly at around 4.5% in 2024 and 2025.

Vacancies ...
Latest data 950,000 (November 2023) we expect the level to fall to around 750,000 to 800,000 by end of 2024, with pressures still persisting in healthcare, social care, retail, accommodation and food.

Earnings ...
Latest date average earnings, (whole economy) up by 7.2% in November. We expect earnings to trend lower to 4.5% by the end of 2024. The increase in minimum wage will have a modest impact on earnings overall at the macro level. Sectors most affected by the increase in National Living Wage are cleaning, social care, health care, retail, accommodation and food.

More Time to Finish The Job ...

Sunak has pleaded for more time to finish the job. "The economy has turned the corner, we are pointing in the right direction. Give me a chance to finish the job. Stick with our plan. A plan that is working." he said.

The ship (and Conservative hopes) may be sinking, not all will think the party is pointing in the right direction. Eleven months is a long time in politics. And a heck of a long time to keep the five families of the Tory party paddling in the same direction and not abandoning ship .