UK economic outlook: the tide is turning

As Spring blossoms emerge after the winter months, businesses and consumers are now also looking for new life in the economy after enduring a long economic frost.

There are tentative signs of improvements in the UK economy. But have we turned a corner yet?

Signs of growth

Although prime minister Rishi Sunak’s confident assertion that the economy has turned a corner may have been a little premature, the tide has certainly started to turn.

First a look back at the recent challenges the economy has faced. Amid high inflation and a cost-of-living crisis, the UK economy has been stagnating for around two years. The UK is one of the slowest countries to recover from the effects of the COVID-19 pandemic, most recently falling into a brief recession in the last two quarters of 2023.

Despite this, the economy has finally shown small signs of improvement this year, with slight monthly GDP growth (0.3% in January and then 0.1% in February) pulling us out of a recession. The Bank of England expects output to grow by 0.25% in 2024 and 0.75% in 2025, suggesting we could be at the start of a more positive economic season - although still far weaker than annual growth of around 3% in the decade before the 2007-09 financial crisis.

The cost-of-living crisis, despite being far from over for many, is abating as inflation has dropped to 3.2%. That is its lowest level in two and a half years, and far below highs of 11.1% in October 2022, which was a 40-year high.

This will be hugely promising news for homeowners and buyers reliant on fixed-rate mortgages, who have been the hardest hit by rising costs and had been hoping for interest rates to fall. Indeed, UK mortgage approvals beat expectations in February to hit their highest in 17 months, according to Bank of England data that reflects the fall in borrowing costs since the middle of last year. The figures suggest recovery in the housing market is continuing slowly.

Household incomes are likely to grow alongside falling inflation. This will be helped by growth in pay packets: wages are forecast to continue to rise faster than prices for most of 2024.

However, analysis by think tank Niesr shows that lower-income households are still set to be grappling with living standards that will be 7-20% higher in 2024-25 than in 2019-2020.

Business leaders more optimistic

Businesses also benefit from a slowdown in inflation: even the long-suffering construction sector managed its best performance in February since August 2023, with an accompanying rise in confidence. Headwinds remain, but these are encouraging developments.

Other business sectors are also benefiting from improvements in the economy. In March, the S&P Global UK manufacturing purchasing managers’ index showed UK manufacturing activity returned to growth for the first time in almost two years on the back of better domestic demand.

Indeed, business optimism in general is creeping higher. Data from the Institute of Directors showed that business leaders are anticipating higher revenue and investment levels over the next 12 months. Although the research showed directors remain on balance slightly pessimistic about the outlook for the economy, they are much more hopeful concerning the prospects for their own businesses. 

This will, we hope, lead to a thawing of businesses investment plans, which have been kept on ice in the economic stagnation and amid high borrowing costs. 

“On the way” to rate cuts

Both consumers and businesses are still awaiting interest rate cuts, which remain unchanged at 5.25%, their highest for 16 years.

At the end of March, Bank of England governor Andrew Bailey told BBC News that "we are on the way" to interest rate cuts. While Bank policymakers are still waiting to see inflation fall further, the drop to 3.4% was "very encouraging," Bailey said. 

These are all promising signs. But in 2024 any economic analysis would be incomplete without consideration of the general election, which is expected in the Autumn.

In an election year, jobs often take centre stage. And they really need to in the UK, where 9.2 million people aged between 16 and 64 are not in work or looking for a job. The total figure is more than 700,000 higher than before the coronavirus pandemic – making the UK the only G7 country with a lower employment rate than before the pandemic, according to the Resolution Foundation.

Workforce shortages prompted Budget measures to encourage people to find work.  But with many companies struggling to find the skilled workers they so desperately need; this remains a key part of the puzzle to help the UK work towards a more sustained recovery.

The impact of the election on the economy is of course a big unknown. But overall, the signs point to continued improvements in growth and confidence in the months ahead.