Six reasons to be optimistic about the UK economy

A potted summary of the UK economy in 2023 would be: ‘not as bad as it could have been’. But as 2024 kicks off, it's hard to escape the sense that things are ‘looking quite good’. Here are six reasons for optimism in 2024.

1. Inflation is falling faster than expected

In November, the Bank of England (BoE) warned that it would take until the end of 2025 to wrestle inflation back to the 2 per cent target. It looks as though it will happen far sooner than that. Despite a surprise uptick last month (see chart), analysts still expect inflation to return to target by the spring. The last mile won’t be easy, but there is no denying that we are on the home stretch.

2. Energy bills will drop again in April

The conflict in the Red Sea stirred up fears that supply shortages could fuel inflation again. Rupert Thompson, chief economist at wealth manager Kingswood, thinks that “the impact so far has been very limited”. Brent oil prices remain around $80 a barrel, against $120 in 2022. 

Analysts at consultancy Cornwall Insight expect the energy price cap to fall by 14 per cent in April, taking a typical bill from £1,928 to £1,660. Deutsche Bank analysts expect falling energy bills to add £10bn-£15bn in cost savings to UK households this year – and it will have the advantage of helping inflation to maintain a downward trajectory, too.

3. The BoE will cut interest rates

Thanks to this lower inflation, the BoE should also be able to cut rates far sooner than we expected at the end of last year. Analysts at Capital Economics expect rates to be cut in June (rather than November), and see the BoE rate falling to 4 per cent by the end of the year. Deutsche Bank forecasts suggest that cuts could come as soon as May if pay growth continues to cool. 

4. Mortgage rates are dropping back 

Rate cuts might still be months away, but lower interest rate expectations are already delivering a boost. Most UK mortgages are on fixed rates, shielding millions of borrowers from higher rates so far. But unlike the US, UK fixes tend to last years, not decades, meaning many homeowners need to refinance this year. Quoted rates on new mortgage lending rose above 6 per cent this summer, but have fallen below 4 per cent thanks to the basic rate cuts now expected this year. 

5. Tax cuts are on the way

Lower market interest rates are already delivering good news for the government, too. Analysts at Dutch bank ING expect lower bond yields to unlock £12bn in ‘headroom’ for the chancellor – in addition to the £13bn he already has. Analysts at Capital Economics think that the government could now freeze fuel duty (costing £6bn per year), as well as abolishing inheritance tax (£8.4bn) and cutting income tax by 1p (£7bn). Depending on where exactly tax cuts fall, analysts think that they could boost growth by between 0.2 and 0.4 percentage points. 

6. We should avoid a bad recession 

The economy might enter a technical recession at the start of this year if -0.1 per cent growth in Q3 is followed by another quarter of -0.1 per cent growth in Q4. But this would be at the very mildest end of the spectrum. Deutsche Bank analysts think that stronger household and business balance sheets, tax cuts and resilient business investment “will likely keep the economy afloat this year”. The soft landing that looked so improbable in 2023 is now their base case. 

7. Are markets up with events? 

Kingswood’s Thompson thinks that although much of this good news is priced in, there could be opportunities at the cheaper ends of bond and equity markets, too. Thompson said that the UK still looks “abnormally cheap”, while US and UK small and mid-cap stocks look like good value. Bond yields (though down from their highs) also remain elevated, and returns could be boosted by capital gains as rate cuts materialise. 

But a word of caution remains. The outlook has changed dramatically over the past few months, and could do so again. Thompson says that “diversification remains crucial in these unusually uncertain times”.