The outlook for Britain was bleak at the start of 2023. The country was on its fourth prime minister in four years, after the brief rule of Liz Truss ended in financial turmoil. Even that political instability was a minor worry for many Britons, given high energy prices, rising interest rates and falling wages. Yet in the end, the worst that could be said for Britain’s economy in 2023 was that it went sideways. Growth was minimal—gdp increased by around 0.5%—but stagnation, not disaster, was the outcome.
Can Britain expect to do better in 2024? Many of the challenges of the past year have faded. The cost of natural gas has fallen sharply, a big cause of the fall in inflation from 10% in December 2022 to a forecast 4.5% in the same month of 2023. Continued strength in the labour market means wages are now growing in real terms. The Bank of England has either finished raising interest rates—from 0.25% in 2022 to 5.25% in July—or will do so soon.
Yet many Britons, other than pensioners, will still see their household incomes fall, says Adam Corlett of the Resolution Foundation, a think-tank. Many homeowners have not yet felt the pinch as they have been on fixed-rate mortgages, which typically last two to five years. Even if the bank does not raise interest rates in 2024 it will still feel for many as though monetary policy is tightening.
There could be some wiggle room later in the year to deliver pre-election tax cuts. But current fiscal policy, alongside the government’s tax and spending decisions, is set to take money out of Britons’ pockets. Subsidies for energy use will end, as will direct payments to poorer households. Tax thresholds, too, have been frozen in cash terms, so that much of the increase in real wages will go to the government rather than to workers.
Many Britons will still see their household incomes fall
The long-term structural factors behind Britain’s economic sluggishness are unlikely to change, either. Productivity, as measured by output per hour worked, has risen by only 6% since 2010. With already high employment and a shrinking working-age population, Britain would have to triple its productivity growth to achieve the same improvement in GDP as before the pandemic, reckons Bert van Ark, an economist at Manchester University’s Productivity Institute.
Inflation could prove to be less sticky than expected, giving the Bank of England room to ease up on monetary tightening. But overall, even if the outlook is better than it was a year ago, Britons can still only cross their fingers and hope it continues not to be as bad as originally feared. ■
Gavin Jackson, Finance and economics correspondent, The Economist
This article appeared in the Britain section of the print edition of The World Ahead 2024 under the headline “Stagnation continuation? ”