The lesson I have learnt from 2023 is not to be too glum on the economy. And in that vein, while I’m not expecting 2024 to be a humdinger for the economy and everyone’s own experiences will be different, for most households 2024 should be a better year than 2023.
Looking back at forecasts made a year ago is usually a humbling experience for most economists. But it is a process that needs to be endured so that lessons from past mistakes can inform future forecasts. In these pages a year ago I said “all I want for Christmas is lower inflation”.
And Santa duly delivered as the easing in CPI inflation from 11.1% in October 2022 to 4.6% in October 2023 (the latest data available) was almost bang in line with my forecast.
However, I was too glum in expecting the combination of the cost of living crisis and the biggest rise in interest rates since the late 1980s to trigger a notable recession and a steep rise in unemployment. Rather than contracting by 0.8% and rising to 5.5% respectively, it looks as though the economy expanded by 0.5% this year and the unemployment rate increased to only 4.2-4.4%.
My mood this time a year ago was more Scrooge than Tiny Tim.
My mistake was underestimating the power of the government’s energy crisis handouts and overestimating the effects of higher interest rates. In the event, the government gave households more cash than I expected and the prevalence of fixed rate mortgages meant that higher interest rates influenced even fewer households than I expected.
The economy may still experience a recession, which is usually defined as it shrinking over a six- month period. But at this stage, I suspect any recession will be so small that it will be a Recession In Name Only (RINO) without much of a rise in unemployment. In 2024 as a whole, the economy may neither grow nor shrink and the unemployment rate may only rise from 4.2% to 4.8%.
In fact, there are two areas in which households will probably be better off in 2024 than in 2023. First, the cost of living crisis is moving into the rear-view mirror. A cost of living crisis can be defined most simply as a period when inflation (the rate at which prices of goods and services are rising) is higher than wage growth (the rate at which wages are rising).
This was the case in 2022 when inflation of 9.1% outstripped wage growth of 6.0%. In 2023, it looks as though inflation of 7.4% will have been very similar to wage growth of 7.5%, so households’ spending power neither went further backwards or took any steps forwards. In 2024, I suspect inflation will be just above 2% and wage growth will be around 5%. That means households will be able to buy more with their hard-earned money.
Second, such a fall in inflation will allow the Bank of England to reduce interest rates. My hunch is that this won’t happen until late in 2024. But there is a lot of speculation it could happen earlier.
Even expectations that it will happen at some point next year have already meant that quoted rates for a 2-year fixed mortgage have fallen from 6.25% in July to 5.63% in November.
Of course, all households won’t benefit equally from these changes and some may not benefit at all.
A mortgage holder who has just locked in a fixed rate deal for two years or more won’t benefit from lower interest rates next year. And those mortgage holders whose two-year or five-year deals are due to expire in 2024 will be moving from a low rate to a higher one. For them, the real financial pinch may come in 2024 rather than in 2023. And, of course, anyone unlucky enough to lose their job will be worse off.
For the average household, though, 2024 will probably be a better year than 2023. And it may provide a glimpse of an even better year to come in 2025. By the end of Dickens’ A Christmas Carol, even Scrooge was optimistic.
Paul Dales is Chief UK Economist of the independent global research consultancy Capital Economics.
