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February 15, 2024 – 3:02 p.m
By William Schomberg and Sumanta Sen
LONDON (Reuters) – British Prime Minister Rishi Sunak suffered a setback on Thursday ahead of the election as data showed the economy slipped into recession in the second half of 2023, but his finance minister Jeremy Hunt said the outlook for this year be better.
Sunak is expected to opt for an election in October or November, when inflation is expected to be lower than now and the economy is growing again, albeit slowly.
There is also a strong chance that the Bank of England will start cutting interest rates around mid-2024.
The charts below show what is expected to happen to some of the key economic indicators this year.
ECONOMY IS SLOWLY RETURNING TO GROWTH
The British economy has been stagnating for around two years following the coronavirus slump and recovery.
The BoE expects output to grow by just 0.25% in 2024 and 0.75% in 2025, much weaker than annual growth of about 3% in the decade before the 2007-2009 financial crisis and even below the rate in the 2010s, a period marked by public spending cuts.
Finance Minister Hunt said previous forecasts for the UK economy had been proven wrong and his plans for the economy were working.
The growth momentum is expected to pick up over the course of 2024
Sunak and Hunt could take comfort from forecasts that show the economy is likely to gain some momentum during 2024.
Analysts polled by Reuters last month expected growth of 0.1% in the first and second quarters of the year, falling to 0.2% in the third and fourth quarters, when elections are most likely to take place.
That would still be far slower than the average quarterly growth of about 0.5% in the five years before the coronavirus pandemic.
Hunt is widely expected to announce further tax cuts in his March 6 budget that could accelerate growth.
Inflation is expected to fall back to 2%
In October 2022, inflation reached 11.1%, its highest level in 41 years, adding to the strain on household finances. After initially trending slowly lower, it has fallen more sharply in recent months and is expected to reach the BoE's target soon, although it is expected to rise slightly again later this year.
With wages rising faster than inflation – they were rising at around 6% annually at the end of last year – income pressures will ease somewhat. Consumer confidence has increased in recent months.
But it will take until 2027 for poorer households to regain their pre-pandemic purchasing power, according to the National Institute of Economic and Social Research, a think tank.
Unemployment will rise, but less than feared
Unemployment is expected to rise throughout 2024 as the impact of the BoE's steep interest rate hikes between December 2021 and August last year hits businesses.
However, the BoE this month cut its unemployment rate forecast for the end of 2024 to 4.6% from a previous estimate of 4.9%, as it adjusted its forecasts to reflect the sharp decline in inflation expected in the coming months.
At 4.6%, unemployment would be significantly lower than in the past. In 2011, when Britain was still recovering from the global financial crisis, unemployment averaged 8.1%.
JUST A SMALL RELIEF IN THE STANDARD OF LIVING
Sunak and Hunt announced a tax cut for workers last November, with a cut in National Insurance contributions starting in January. Lower-income households will get another boost in April when the minimum wage increases by nearly 10%.
But real household disposable income remains on track for its only election-to-election decline since World War II, according to the Resolution Foundation think tank. The last general elections took place in December 2019.
The government says this pain is largely due to its attempts to repay the huge costs of supporting the economy and households during the pandemic and the rise in energy prices in 2022.
MORE COMPETITIONS?
Sunak and Hunt have made it clear they want to cut taxes again for households and businesses and they are researching the figures ahead of the annual Budget statement on March 6.
The Financial Times reported on Wednesday that Hunt is considering cutting billions of pounds from already stretched public spending plans to fund tax cuts in his budget if public finances prove too tight to do otherwise.
The Resolution Foundation estimates that the 13 billion pounds ($16.3 billion) in scope Hunt had for tax cuts or additional spending after his budget update in November was less than half the average of most of his predecessors since 2010.
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