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Economic update: why the recession may soon be over

Author: ICAEW Insights

Published: 08 Apr 2024

The UK’s recession appears to be ending with cuts to summer interest rate likely. ICAEW’s Economies Director Suren Thiru discusses the key points to watch.

The UK has taken a step away from recession as the economy grew 0.2% in January, according to official figures, more than offsetting the 0.1% contraction in December 2023.

Despite this progress, challenges include a weakening job market and a hazy economic outlook. While inflation is easing and there are hints of interest rate cuts, the road to recovery is uncertain, impacting accountants, business owners, and the economy at large.

A mix of wet weather and the lingering interest rates in the first quarter of this year could dampen the swift economic recovery that many are predicting. So what indicators suggest a rapid recovery from the UK recession?

Household disposable income rose despite recession

Updated GDP figures from the Office for National Statistics (ONR) reveal that real household disposable income – the money households have available to spend or save after accounting for taxes and adjusting for inflation – rose by 0.7% in Q4 2023, having recorded zero growth in Q3 (see Chart 1).

economic update 1

This improvement reflected the boost from high wage growth and falling inflation. However, households used the rise in disposable income to build up their savings, rather than boost their spending. The household saving ratio — the proportion of income that is saved — rose to 10.2% in Q4 2023, well above the long-term average of 7%. In contrast, real household expenditure dropped by 0.1%.

Inflation struggle nears finish line

UK CPI inflation slowed to 3.4% in February, the lowest rate since September 2021 and down from 4.0% in January (see Chart 2). The largest downward pressure on inflation came from food, and restaurants and cafes, while the largest upward contributions came from housing and household services, and motor fuels.

economic update 2

Prices for food and non-alcoholic beverages rose by 5% in the year to February 2024, the lowest rate since January 2022 and down sharply from the recent high of 19.2% in March 2023. In contrast, the average price of renting property privately increased by 9% in the year to February 2024, up from 8.5% in the previous 12 months. This is the biggest annual percentage change since records began in January 2015.

Labour market conditions softening

In the three months to January 2024, the UK unemployment rate rose marginally from 3.8% to 3.9%. The number of people claiming jobless benefits increased by 16,800 in February. The number of job vacancies, a good indicator of demand for workers, fell by 43,000 in the three months to February 2024 to 908,000. Meanwhile, vacancy numbers fell in 14 of the 18 sectors, suggesting a broad-based weakening in labour demand. Average earnings growth, excluding bonuses, slowed to 6.1% between November and January, down from 6.2% in the previous three months.

Summer interest rate cuts likely

As was largely expected, the Bank of England kept interest rates on hold at 5.25%, leaving the cost of borrowing at its highest level since 2008 for the fifth time in a row. Significantly, the interest-rate-setting Monetary Policy Committee (MPC) voted 8-1 in favour of this decision, the first time since September 2021 that no MPC member voted to tighten policy.

The one member (Dr Swati Dhingra) who voted against the proposition preferred to cut the rate to 5%. The more dovish vote split suggests that rate-setters are opening the door for rate cuts later this year. With inflation on track to drop back to the Bank’s 2% target in April, an interest rate cut by August looks a distinct possibility.

Significant divergence between BoE and OBR forecasts

The latest economic forecast from the Office for Budget Responsibility (OBR) paints a notably optimistic picture of the UK’s near-term growth prospects. It expects the UK economy to grow by 0.8% this year (see Chart 3), beating its previous forecast of 0.7% growth made in November. Expectations for GDP growth are now 1.9% in 2025, up from predictions in November of 1.4%’ GDP growth in 2025.

economic update 3

The OBR still expects the UK economy to grow by 2% in 2026. In contrast, the Bank of England currently forecasts a significantly weaker trajectory, with GDP growth of 0.2% in 2024, 0.6% in 2025 and 1.1% in 2026. With little new action to address the supply side constraints weighing on economic activity, the recovery from recession may be more muted than the OBR is forecasting.

Implications for accountants, business owners and economy

While these figures suggest the UK is on track to exit recession this quarter, the squeeze from high interest rates and persistent labour shortages may mean that the recovery is more subdued than many are predicting.

UK economy – what to watch for this month:

  1. The next set of GDP figures, to be released by the ONR on 12 April, should show that economic activity was muted in February with the significant wet weather likely to have suppressed output.
  2. ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – will be launched on 24 April, covering the first quarter of 2024.

Links to support

For more insights, analysis and resources for organisations facing the rising costs of doing business – visit ICAEW’s Cost of doing business hub.

ICAEW also works with caba to promote the mental health of chartered accountants and their families, producing articles, guides, webinars, videos and events to provide support during these difficult times.

A new Resilience and Renewal campaign has also been launched by ICAEW to explore some of the most serious systemic challenges facing the UK economy. It brings together government ministers, leading academics, economists to look at how to build a better, more resilient future economy and the vital role UK business and chartered accountants can play.

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