Analysing the º£½ÇÊÓƵ's economic trajectory in 2024 has proven to be complex. At the year's outset, a consensus among forecasters suggested another stagnant year for the º£½ÇÊÓƵ.
"Expectations were bleak coming into 2024," commented Sanjay Raja, Deutsche Bank's chief º£½ÇÊÓƵ economist. "External forecasters were projecting near zero per cent growth for the entire year."
Contrary to these forecasts, the º£½ÇÊÓƵ economy experienced a swift recovery from the downturn that concluded 2023, growing by 0.7 per cent in the first quarter, as reported by .
This rebound positioned the º£½ÇÊÓƵ as one of the fastest-growing G7 economies in the first half of the year. However, this rapid growth did not persist.
Recent data indicates a significant slowdown, with the economy shrinking for two consecutive months as of October and showing little to no growth since June. "The risk of a recession has suddenly become real," stated Paul Dales, Capital Economics' chief º£½ÇÊÓƵ economist.
Despite the slowdown, the strong performance in the early months means the º£½ÇÊÓƵ is still on course for a 0.8 per cent growth over the year. The question remains: what caused the loss of momentum?
What happened to the º£½ÇÊÓƵ economy?
Three interrelated factors are at play, with the initial 'catch-up' growth phase inevitably leading to a subsequent slowdown.
At the close of 2023, the º£½ÇÊÓƵ's economy was notably undershooting its potential growth rate, with a significant margin of untapped capacity. However, as 2024 commenced, there was a discernible rebound.
Businesses grew more confident, revisiting decisions previously shelved. Households, too, demonstrated an increased propensity to spend.
Yet, this upturn was not expected to be a permanent fixture. The recent economic deceleration has been more abrupt than many experts had anticipated mere months ago.
A pivotal contributor to this slowdown has been interest rates. There's been a considerable shift in market expectations regarding the trajectory of interest rates and thus the real economy's borrowing costs within this year.
Initially, markets projected around five rate cuts; instead, we've witnessed merely two. This shift has rippled through to economic activity.
Research from Capital Economics highlighted that earlier in the year, sectors experiencing rapid growth were those most affected by interest rate fluctuations — those poised to benefit most from swift rate reductions.
As the anticipated rate cuts did not come to fruition, sectoral activities lost momentum. "Hopes at the start of this year that interest rates would fall rapidly have given way to the reality of rates being reduced only gradually," commented Paul Dales from Capital Economics.
Rachel Reeves must take some of the blame
Beyond these factors lies another critical consideration: policy. The timing of the economic downturn coincides with Labour's assumption of power, implying a degree of responsibility on the part of Rachel Reeves for the slowdown.
Over the autumn period, there was a marked dip in both consumer and corporate confidence, amidst signs of an impending tough budget. Following the fiscal announcements, business surveys have pointed towards a deepening economic slowdown, exacerbated by the hike in national insurance contributions.
In a stark indication of the economy's troubles, the private sector saw the steepest reduction in employment for nearly four years this December, as reported by S&P's purchasing managers' index (PMI). .
"Businesses and households have responded negatively to the new Labour government’s downbeat rhetoric and policies," commented Chris Williamson, chief business economist at S&P Global Market Intelligence, casting doubts about the º£½ÇÊÓƵ's economic prospects for the upcoming year. Despite these concerns, economic forecasters are predicting that the º£½ÇÊÓƵ's growth will pick up to 1.3 percent in 2025, which would be an improvement over the performance expected in 2024.
Optimism persists owing to several robust economic fundamentals. The labour market is still going strong with sustained wage growth – a silver lining even as inflation rates begin to ease off.
Additionally, º£½ÇÊÓƵ consumers appear relatively secure due to the general unwinding of household debt since the global financial crisis.
However, the future remains uncertain, especially as businesses navigate the added pressures from higher national insurance charges and the unpredictability brought by a potential second term for Donald Trump in the White House. Nevertheless, economists are holding back from dismissing the º£½ÇÊÓƵ's economic outlook prematurely.
