As the new year begins, real and economic storm clouds are battering Britain. Yet while there are reasons for concern, we can also allow ourselves some cheerfulness about economic and market prospects.
First, just as the pandemic crisis faded out of sight in 2022-23, the inflation crisis that followed is now gradually moving into the rear-view mirror.
Second, last year the UK economy avoided the predicted severe recession. Admittedly, it might have ended the year in a very mild one. UK gross domestic product (GDP) fell in Q3 by 0.1 per cent, and is estimated to have shown no growth in Q2. We won’t know if recession status can be confirmed until the Office for National Statistics (ONS) releases data for the last quarter in mid February.
Third, household cost pressures are easing with the fall in inflation. Through real wage growth, they are regaining purchasing power, which should lead to upwards momentum in retail spending. Pantheon Macro points out that many households have also now rebuilt the savings buffer they lost last year. Although rail and NHS strikes continue, there’s likely to be no more talk of a “return to the 1970s”.
The stabilising macro backdrop will encourage business confidence and willingness to invest in the future – some recent business surveys are showing positive signs.
Cheaper mortgage rates will spur deals, and will also benefit the estimated 1.5mn households who will need to remortgage this year as their old lower fixed-rate deals come to an end.
The Centre for Economics and Business Research (CEBR) calculates that the UK will maintain its position as the world’s sixth-largest economy over the next few years, and will grow more quickly than France (notably, CEBR also says India will become the world’s third-largest economy by 2035).
There may be tax giveaways in the 6 March Budget. The stock market will be buoyed as much by US interest rate cuts as by UK ones. The Bank of England (BoE) base rate is expected to be 3.25 per cent by the end of the year even in the face of the BoE’s wariness over tightness in labour markets continuing to drive strong wage growth. That, combined with the compelling value of domestic listed companies, augurs well for returns.
We can’t overlook the real and large hurdles to economic expansion in the year ahead, particularly the lagged effect of high rates on the economy and employment, the impact of the nation’s extraordinarily high tax burden, and long-standing low levels of private and public sector investment which continue to keep growth in check.
It’s why most economists are predicting fairly tepid growth in the year ahead: of around 0 to 0.7 per cent. If business investment in Britain had matched the average of France, Germany and the US since 2008, UK GDP would be nearly 4 per cent higher today, says the Resolution Foundation (RF), which argues in a recent booklet (The Economy 2030) that “after 15 years of decline”, what is needed is a new economic strategy to reverse decades of underinvestment and to build on Britain’s strengths as a services superpower and the second-largest exporter of services in the world, and prowess as a specialist manufacturer.
RF’s recommendations are broadly as you might expect – high-value-added manufacturing firms must be supported to retain their place in European supply chains; new service trade agreements should be signed (as indeed the UK has done in signing a frictionless trading pact with the Swiss in financial services), education must be harnessed to drive people-powered growth and the UK’s second cities must be made more productive – something it acknowledges would require a lot of investment by government.
But it also identifies a rising threat from a relatively new feature of the British business landscape: the steep rise in foreign ownership of companies. This is “dangerous for Britain” and carries the risk of “firms being run myopically with profitable investment foregone”.
Many economists agree that something has to change and are calling for similar big policies and a new overarching growth strategy along with a state-of-the-economy annual address. There are also calls for a radical reform of planning (from those who believe building is the solution) and a sea change in government spending allocated to research and development.
A newly formed government with a mandate of five years in power might possess the determination to drive real change here. With the challenges of the pandemic and high inflation behind us, and the climate change one increasingly making its presence felt, now is when it might be possible to achieve it.
