UK voters will enjoy higher wages but continue to struggle with mortgages and rent ahead of the next election as the cost of living crisis gives way to an uneven “grey gloom”, according to a Financial Times economists survey.
A majority of the 90 respondents to the FT’s annual poll of leading UK-based economists said despite falling inflation voters would feel little improvement in their living standards before the general election expected this year.
With prices remaining far higher than before the inflationary surge, Andrew Oswald, a professor at Warwick university, said a partial catch-up of wages in 2024 would feel like swapping “black gloom” for “grey gloom”.
People on low pay will benefit from a big rise in the minimum wage and pensioners will still enjoy good savings rates, while renters and 1.5mn to 2mn households renewing mortgages will face much higher costs, respondents said.
“The broadly felt cost of living squeeze of the last 18 months will give way to a backdrop in which some households enjoy a recovery . . . while others struggle,” said Matt Whittaker, who heads the charity Pro Bono Economics.
Almost all respondents to the survey predicted growth would stagnate or at best hit 0.5 per cent in 2024. But the worst problem of 2023 — inflation — should be “moving into the rear-view mirror”, said Paul Dales of the consultancy Capital Economics.
Chancellor Jeremy Hunt told the FT last month that 2024 would be the year to “throw off our pessimism and declinism about the UK economy”.
His national insurance tax cuts come into effect this month and Hunt is expected to announce further tax cuts in the March Budget, hoping that voters will feel the economy is on the mend when they go to the polls.
Forecasts for the UK economy have in recent years erred on the side of pessimism, including those submitted to the FT last New Year that predicted the UK would suffer the worst recession in the G7 in 2023, rather than the near-stagnation that has transpired.
In the 2024 FT survey, economists warned there was not time, even if Prime Minister Rishi Sunak delayed an election until the last possible date of January 2025, to fully repair the damage to living standards sustained in recent years.
“Real wages will be rising, but so will unemployment, the tax burden, rents and the average interest rate on the stock of mortgages,” said Michael Saunders, a former Bank of England rate-setter now at the consultancy Oxford Economics. “I do not expect a feelgood factor in the run-up to the election,” he added.
“Living standards for most will have stagnated over the lifetime of the Parliament,” said Charlie Bean, former chief economist at the BoE.
Even though the FT’s survey closed before the latest encouraging official data, most respondents thought inflation would fall to a “reasonable” or “acceptable” level by the end of 2024, and that the BoE’s 2 per cent target would by then be “within reach” although not yet achieved.
Respondents expected the BoE would cut interest rates only gradually from mid-year. Markets currently expect the BoE will start cutting its bank rate in the spring from 5.25 per cent to 3.75 per cent by the end of the year.
DeAnne Julius, a former BoE policymaker, said relatively low unemployment could keep core inflation “sticky” while energy prices remained “spiky” due to conflict in Ukraine and the Middle East.
Jessica Hinds, director at Fitch Ratings, said the BoE would “certainly not be able to rest easy in 2024”.
Despite lower inflation, people would feel worse off until they saw a sustained improvement in disposable income, said Bronwyn Curtis, a non-executive director at the Office for Budget Responsibility’s Oversight Board. “This is not going to happen between now and an election.”
Several respondents said individual fortunes would vary far more over the year ahead than they did in 2023.
Those who own their homes outright are set to be winners, along with lower-paid employees and pensioners with significant savings.
But James Smith, research director at the Resolution Foundation think-tank, warned of a “rough justice on housing costs” for renters signing new contracts and many households renewing fixed rate mortgages.
Benefits recipients will also lose out as state support for energy bills ends in March. While national insurance cuts will help some employees, the tax burden is still set to rise overall as a result of frozen income tax thresholds.
Unemployment is low by historic standards but most respondents to the survey said it was set to rise over the year ahead from 4.2 per cent to between 4.5 per cent and 5 per cent by the end of 2024.
Alfie Stirling, chief economist at the Joseph Rowntree Foundation, said that for many in less secure industries, “the worst may be still to come” as higher interest rates prompt companies to cut jobs.
Many economists said that higher public investment would be the key to lift the UK’s long-term economic growth rate — even if this was unlikely to happen until a new government was in place.
“The issue isn’t just incomes and inflation, but that people’s experience day to day is getting worse as public services crumble,” said Diane Coyle, professor of public policy at Cambridge university.
She added: “The bill for sustained under-investment in everything from infrastructure, health and education to private business is coming due.”
Many respondents were sceptical there would be any fresh impetus to boost the UK’s woeful growth prospects — at least until the election delivers greater political certainty to underpin investment.
Their forecast of at best 0.5 per cent growth would be no worse in the short term than the growth rates expected in battered EU economies, but it would leave the UK trailing the US.
Jack Meaning, UK chief economist at Barclays, said the UK economy would remain “stuck on pause”.
More worrying is that the UK’s growth has been anaemic for years. Economists see little prospect of it reviving without a big policy reset.
“Productivity growth is close to zero. New thinking is needed on how to put that right,” said Erik Britton, managing director at Fathom Consulting.
Lydia Prieg, head of economics at the New Economics Foundation, said the UK economy was “in an economic rut” and that “we are all poorer because of it”.
Asked which single policy change following the next election could do most to revive long-term growth, a large minority of respondents called for planning reforms, which Ray Barrell, professor at Brunel university, said could add 1 per cent a year to output growth.
But larger numbers said the top priority for any new government should be a significant, sustained increase in public investment — changing the government’s self-imposed fiscal rules if needed to accommodate it — alongside a push for businesses to step up their own capital spending.
“UK public investment has been not only low but also much more volatile than our G7 counterparts,” said Jumana Saleheen, chief European economist at Vanguard, adding that “bouts of feast and famine” in public sector projects created uncertainty that also deterred the private sector from investing.
Francis Breedon, professor at Queen Mary University London, said the UK needed to return public investment to 3.5 per cent of gross domestic product, the average for nations in the OECD group of richer countries, “to create a public infrastructure capable of supporting growth”.
A push of this kind could encompass investment in human capital — health, social care, schooling and skills — as well as in clean energy and decarbonisation, and physical infrastructure such as transport.
But no respondent thought this likely to take place in the fraught atmosphere of an election year, with political uncertainty instead likely to weigh on the economy until a new government is in place.
“The country needs political and economic stability. Since 2010 we had five different prime ministers and seven different chancellors of the exchequer,” said Costas Milas, professor of finance at Liverpool university. “How on earth can business investment thrive?”