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Mark delivered an attention-grabbing speech on the current state of the UK economy and provided his insight into what is likely to come .
Here we share Mark ’ s thoughts as we all prepare for the new year ahead .
The going turns soft ( again ) The global economy has run out of puff in the past few months , just as it did after a bright start in 2022 . Last year , the war in Ukraine was the culprit ; this year it ’ s the dampening effects of higher borrowing costs .
The manufacturing sector is suffering more than the services sector . Around the world , many households are still stuffed with goods acquired during the pandemic which won ’ t need replacing for some time , while many businesses have understandably decided that the current juncture is not right for embarking on major capital expenditure . As a result , the volume of goods being transported around the globe has been running at 3-4 % below last year ’ s level .
The brunt of the slowdown is being borne by western Europe and China . For the former it ’ s high interest rates that are doing the damage , while in the latter it ’ s the ongoing slump in the real estate sector .
Some wins in the war on inflation Re-establishing a semblance of price stability has proved to be much harder than was expected a year ago , with policy interest rates now back to levels not seen since 2007- 08 . The medicine has worked , in as much as headline and “ core ” rates of inflation have come down significantly ; but they ’ re still well above the mandated targets .
On the strength of recent falls in inflation rates and the growing evidence that economic activity and labour markets
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are softening , at their September policy meetings the major central banks were finally able to signal that the long period of painful rate hikes is about at an end . The odd further increase can ’ t be ruled out , and indeed the Bank of England ’ s decision to keep its base rate on hold at 5.25 % was a knife-edge 5-4 vote .
“ higher for longer ” For the UK and western Europe , the coming winter is set to be a re-run of the last one , with economies at risk of falling into shallow recessions . For even if interest rates have peaked , it ’ s during the next six months or so that borrowers will feel the maximum pain from the extended period of monetary tightening .
With “ higher for longer ” being the new mantra from the central banks , it will be the middle of next year before any of them start to think about cuts .
The UK treads water There ’ s no getting away from the fact that the UK has had a torrid time since the Covid pandemic . The economy has expanded by less than 2 % since the closing months of 2019 , and it ’ s the only major advanced economy where the rate of economic inactivity has increased . The acute shortage of labour , which emerged in 2021 , has not only crimped growth but has helped to drive inflation higher .
After 2022 ’ s trials and tribulations , 2023 got off to a brighter start as fuel bills fell back and as many employees were able to bid up their earnings . But thanks to some nasty data surprises , interest rates ended up rising further than many people had hoped , so that the various business surveys now suggest that growth has again
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stalled . Retail spending , the housing market , housebuilding , and commercial real estate are just some of the areas which are clearly suffering .
But there has also been some better news . The headline rate of inflation dropped sharply in July , while the underlying , or “ core ” rate fell more than expected in August . As a result , five-year fixed rate mortgages can now again be had for under 5 %. It won ’ t be enough to galvanise the housing market , but it should take some of the edge off the recent gloom .
With the BoE still holding out the threat of further rate hikes , and with little likelihood of cuts being considered until the autumn 2024 , the UK ’ s economy is set to continue to tread water for some time yet .
Although households ’ real incomes have started rising again , and while many people are still sat on savings built up during the pandemic , it ’ s younger cohorts who tend to be the biggest spenders , the same people who are having to cut back on non-essentials in order to afford higher mortgage and rent payments .
Lower inflation will pave the way for more growth Headline and “ core ” inflation rates will both continue to trend lower throughout 2024 as the labour market loosens . The key metric to watch will be the number of vacancies , which should be back to it ’ s pre-pandemic level of around 850,000 , by the spring of next year . Employees will therefore gradually see their bargaining power erode , which will help curb
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“ core ” inflation . Nonetheless , it ’ s likely to be some time in 2025 before the headline rate of inflation approaches the 2 % target .
This subdued growth environment will inevitably pose challenges for many businesses , with a return to anything like pre-pandemic conditions unlikely before the first half of 2025 . Yet the fact that inflation is receding will also bring greater certainty to costs and revenues . It will therefore become easier for firms to make a reasonable assessment of the costs of potential capital expenditure schemes .
Higher borrowing costs and negligible growth have already taken their toll on businesses , with a sharp increase in the number of failures and restructurings . This situation is not likely to improve noticeably for 12-18 months , during which time those firms which need to refinance borrowings could find lenders in a cautious frame of mind .
Navigating turbulent times , always requires professional support to help interpret a changing fiscal and monetary landscape and we would always recommend that you engage with your trusted advisors early on . If you would like to discuss any aspects of your business finances , please don ’ t hesitate to get in touch . Call : 01225 800849 or Email : enquiries @ swbf . co . uk
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