A survey by economists found that UK voters would enjoy higher wages, but struggle to pay their mortgages and rents ahead of the next general election. The cost of living crisis will give way to a “grey gloom” as the cost-of-living crisis is relegated to the background.
The majority of 90 economists who responded to an annual survey of UK-based leading economists stated that despite the falling inflation, voters will feel little improvement in living standards prior to the general elections due this year.
Andrew Oswald of Warwick University said that a partial catch up in wages by 2024 would be like switching from “black gloom to grey gloom”.
Respondents said that people on low wages will benefit from an increase in the minimum wage, and pensioners can still expect to enjoy high savings rates. However, renters, and households renewing their mortgages, will be faced with much higher costs.
“The cost-of-living squeeze that has been felt by many households over the past 18 months is about to give way to an environment where some families will enjoy a rebound. . . While others struggle,” Matt Whittaker said, the head of Pro Bono Economics.
Most respondents predicted that growth in 2024 would be stagnant or, at most, a mere 0.5 percent. Paul Dales, of Capital Economics, said that the biggest problem for 2023 — inflation — would be “moving in the rearview mirror”.
Last month, Jeremy Hunt said that 2024 was the year “to throw off our pessimism about the UK’s economy”.
Hunt will announce more tax cuts when he releases the Budget for March. He hopes that voters feel the economy improving as they head to the polls.
In recent years, forecasts of the UK economy have been pessimistic. For example, those made for the new year last year predicted that the country would experience the worst recession among the G7 countries in 2023. However, the near stagnation has actually occurred.
The economists in the survey warned that there would not be enough time to repair the damages to the living standard sustained over the past few years, even if Rishi Sunak pushed back an election to the last date possible, January 2025.
Michael Saunders said that real wages would rise, as well as unemployment, tax burdens, rents, and the average rate of interest on mortgages. He is now a consultant at Oxford Economics, where he was formerly a Bank of England rate setter. “I don’t expect a feeling of goodwill in the lead-up to elections.”
Charlie Bean, former Chief economist at the BoE, said that “living standards for the majority will have stagnated during the lifetime of parliament”.
Even though the survey was closed before the most recent encouraging official data were released, the majority of respondents believed that inflation would drop to a “reasonable or acceptable” level by 2024 and the BoE’s 2% target would be “within reaching” but not yet reached.
The respondents expected that the central bank will only reduce interest rates gradually starting in mid-year. The markets currently expect that the BoE will begin reducing its bank rate from 5.25 percent to 3.75 percent by the end the year.
DeAnne Julias, a former policymaker at the central bank, said that relatively low unemployment may keep core inflation “sticky”, while energy prices remain “spiky” due to conflicts in Ukraine and Middle East.
Jessica Hinds of Fitch Ratings said that the BoE “would not be able rest easy in 2024”.
Bronwyn Curtis said that despite lower inflation, the people would still feel worse until they saw an improvement in disposable income. “This will not happen before an election.”
Many respondents predicted that fortunes of individuals would be much more varied in the coming year than they were in 2023.
The winners are those who own their home outright, as well as lower-paid workers and pensioners that have significant savings.
James Smith, the research director of Resolution Foundation, warned that renters who sign new contracts, and households renewing their fixed-rate mortgages, would face a “rough justice” on housing costs.
The state’s support for energy bills will end in March, which means that those who receive benefits will also suffer. The reduction in national insurance will benefit some employees but the overall tax burden will increase due to the frozen income tax thresholds.
The unemployment rate is historically low, but the majority of respondents said that it will rise in the next year from 4,2% to 4.5-5.0% by the end 2024.
Alfie Stirling is the chief economist of the Joseph Rowntree Foundation. He said that “the worst could be yet to come” for those in industries with less job security, as rising interest rates cause companies to reduce their workforce.
Many economists believe that higher public investments will be key to lifting the UK’s economic growth rate over the long term, even though this is unlikely to occur until a new administration takes office.
Diane Coyle is a professor of public policy and public administration at Cambridge University. She said that the issue was not just about incomes or inflation but also how people are affected by the decline in public services.
She said: “The bill of sustained underinvestment in infrastructure, health and educational to private businesses is due.”
Many respondents were skeptical that there would be a fresh boost to the UK’s bleak growth prospects – at least until greater political certainty is provided to support investment.
The UK’s forecast of a growth rate of 0.5 percent is no worse than that expected for the EU, which has been battered by the recession. However, it will leave the UK behind the US.
Jack Meaning, UK Chief Economist at Barclays said that the UK economy will remain “stuck in pause”.
The UK’s anaemic growth is even more concerning. Economists believe that it is unlikely to revive without a major policy reset.
“Productivity Growth is Near Zero” Erik Britton is the managing director of Fathom Consulting. He said that new thinking was needed to fix this problem.
Lydia Prieg is the head of the New Economics Foundation’s economics department. She said that the UK economy “is in an economic rut”, and “we are all the poorer for it”.
When asked which policy change could be most effective in reviving long-term economic growth after the next elections, a majority of respondents suggested planning reforms. Ray Barrell from Brunel University said that this could increase output growth by 1 percent per year.
A larger number of respondents said that the priority for any future government should be to increase public investment – changing government fiscal rules to accommodate this if necessary – and to encourage businesses to boost their capital expenditure.
Jumana Saleheen is chief European economist for Vanguard. She said that UK public investment was not only low, but also more volatile than its G7 counterparts.
Francis Breedon, Professor at Queen Mary University London said that the UK must return to a level of public investment of 3.5 percent of the gross domestic product – the average of the richer nations of the OECD – “to create a infrastructure capable of supporting economic growth”.
This could include investments in the human capital – health, education, social care and skills – as well as clean energy, decarbonisation and physical infrastructure, such as transport.
No respondents thought that this would happen in an election year. Instead, they believed that political uncertainty will weigh on the economy for a while until a new government takes office.
Costas Milas is a professor of finance from Liverpool University. He said, “The country requires political and economic stability.” Since 2010, we have had five prime ministers, and seven chancellors. “How on earth can investment in business thrive?”