With the economy still recovering from the effects of the Covid-19 pandemic and costs high for businesses and households alike, it’s wise to approach the coming year with a measured outlook.
We recently delved into the Office for Budget Responsibility’s (OBR) most recent economic forecast to decipher what 2024 has in store for your finances and business. So, let’s break it down.
The economic landscape
The OBR’s latest report aimed to encapsulate the state of the UK economy, considering changes in national spending and the tax system outlined in the Autumn Statement.
Despite Jeremy Hunt’s extensive list of measures to “grow the economy”, the OBR has revised its economic growth forecast for 2024 and 2025, downgrading expectations from the spring.
In the face of pandemic shocks and an energy crisis, the economy has proven more resilient than anticipated. However, the persistence of inflation and higher-than-expected interest rates paints a more nuanced picture. The current prediction is a 0.6% growth by the end of 2023, a notable shift from the anticipated 0.2% contraction projected in March 2023.
Looking ahead, the OBR envisions a modest growth of 0.7% in 2024, followed by 1.4% in 2025, 1.9% in 2026, 2.0% in 2027, and 1.7% in 2028. These figures mark a downgrade from the initially forecasted 1.8% growth in 2024 and 2.5% in 2025, as stated in the Spring Budget.
Inflation and living standards
Recent data from the Office for National Statistics (ONS) reveals a decline in the inflation rate to 4.6%, down from 6.7% in September. This easing can be primarily attributed to significant increases in the Bank of England (BoE) base rate over the past two years.
While this decrease aligns with the Prime Minister’s pledge to halve the inflation rate by the end of 2023, it’s essential to note that inflation, which peaked at 11.1% in October last year, is still above the Bank’s desired “normal levels” of around 2%. The expectation is for inflation to gradually slow throughout 2024, but it’s unlikely to reach this target until the end of 2025.
Furthermore, real household disposable income per person is forecasted to be 3.5% lower in 2024/25 than pre-pandemic levels, representing the most substantial reduction in living standards since the 1950s.
Recovery to pre-pandemic levels is projected for 2027/28, with the reduction in National Insurance Contributions (NICs) announced in the Autumn Statement expected to boost real household incomes by around 0.5%.
Unemployment and public finances
Unemployment is anticipated to peak at 4.6% in the second quarter of 2025 as GDP growth slows. Labour market participation is declining, coupled with weakened labour demand, evidenced by a decrease in vacancies from 1.3 million in May 2022 to around 960,000 in October 2023.
On the front of public finances, the OBR projects underlying debt to be 91.6% of GDP next year, rising to 92.7% in 2024/25 and peaking at 93.2% in 2026/27. Debt is expected to decline in the final two years of the forecast, reaching 92.8% in 2028/29.
Interest rates
After a series of 14 consecutive base rate hikes, the BoE maintained its base rate at 5.25% for the first time in nearly two years this September. In line with the OBR’s forecast, this rate remains at this level as we enter 2024.
The forecast also suggests that interest rates have now hit their peak, and should gradually fall back to 4% by 2029.
While the sharp fall in inflation might hint at a possible reduction in interest rates, BoE governor Andrew Bailey suggests it’s premature to consider rate cuts. Market expectations align with the BoE’s projection, anticipating a peak in the base rate before a gradual descent.
Your financial path forward
When navigating the economic terrain of 2024, grasping the subtleties is crucial. You should keep a watchful eye on inflation and living standards, and consider how these forecasts may impact your personal and business finances.
The road ahead may have its twists and turns, but with informed decisions, adaptability and a steady hand, you can navigate the economic terrain with confidence.
At Bulley Davey Wealth Management, we thrive on providing quality financial advice to personal and business clients. Get in touch with us today and let us guide you through 2024.