The UK economy might see a slight dip soon, but economists at Pantheon Macroeconomics expect people to start spending more towards the end of the year as their incomes rise. This spending increase is likely to help the UK economy pick up again.
“PMI data signal a mild recession, but we still expect brisk real income growth to lift households’ spending in Q4,” says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics.
Tombs points out that despite signs of a small recession, the situation for British consumers might improve later this year because they’ll have more money to spend. The forecast also predicts a slight increase in the cost of living due to energy prices, but less than what the Bank of England was expecting.
CPI inflation forecast to peak at 3.0% in 2024, lower than BoE’s projection
“We have nudged up our forecast for CPI inflation in 2024 to 3.0%, from 2.7%, due to higher energy prices,” Tombs explains. “But, as he further adds, this is still less than what the Bank of England was expecting, and if inflation isn’t as high as feared, interest rates might be cut from the second quarter of 2024 onwards.
The Bank of England raised its benchmark interest rate by 25 basis points to 5.25% last week, citing the need to curb inflationary pressures and maintain financial stability. The BoE also projected that inflation would peak at 4.0% in the second quarter of 2024, before falling back to its 2.0% target by the end of 2025.
However, Tombs argues that the BoE’s inflation forecast is too pessimistic, and that the labour market will ease as more workers return from furlough and immigration picks up. He also expects the government to increase its support for low-income households to cope with the rising cost of living.
Bank Rate to be reduced by 75bp in 2024, according to Pantheon Macroeconomics
Tombs dives into the details, saying that not everyone will rush to spend the extra money. “Not all of this additional cash will be spent. Some households will replenish their savings that have taken a battering in real terms over the last two years,” he notes.
However, the UK economist thinks that the extra money the government is giving to help with the cost of living will indeed lead to more spending, which is important for economic growth. He also sees a shift in the job market that could lead to less pressure on wages and prices, which might allow the Bank of England to lower interest rates gently.
“We think that the case for the MPC to reduce Bank Rate incrementally will strengthen early next year, and expect the Committee to reduce it by 25bp in May, August and November, leaving it at 4.50% by the end of 2024,” he predicts.
This would be a cautious move towards making borrowing cheaper again after the rapid rate increases we’ve seen recently. Pantheon Macroeconomics suggests the UK government will likely keep a tight grip on spending, despite some people hoping for a softer approach given the current expensive debt payments.
Chancellor unlikely to change course in the Autumn Statement, says Pantheon Macroeconomics
“The Chancellor has an opportunity to change course in the Autumn Statement on November 22. But with the OBR set to revise up its forecast for debt interest payment sharply, we doubt that he will risk adding to public borrowing by softening the consolidation plans,” Tombs asserts.
This means that despite the economic pressures, the government is not expected to borrow more money, sticking to its plan to keep spending under control. The OBR, or the Office for Budget Responsibility, is an independent body that provides economic and fiscal forecasts for the UK government.
The UK economy grew by 4.8% in the second quarter of 2023, rebounding from the pandemic-induced contraction in 2022. However, the recovery has been uneven and uncertain, as the country faces supply chain disruptions, labour shortages, rising energy costs, and the impact of Brexit.