- The recession is likely already behind us
- But it won’t all be plain sailing this year
A year ago, inflation was in double digits, interest rates were climbing towards a 16-year high and the UK was marching towards a technical (albeit mild) recession. Today, the economy is on a far more even keel and this return to normality should gather pace in the second quarter.
1. Inflation is about to return to target
There is an overwhelming consensus that inflation will fall below 2 per cent in April, with figures confirming this in May. This will end almost three years of above-target inflation, as the chart below shows.
2. Rate cuts are coming soon
Although the Bank of England (BoE) kept rates on hold last month, the Monetary Policy Committee (MPC) gave two important signals. Both remaining hawks voted to hold rates (having favoured further hikes in February) and the MPC stressed that “the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced”. In simple terms, this means rates are so high already that they could still put downward pressure on inflation even if cut slightly.
But two questions remain: exactly when rate cuts will come and how low rates will go. Economists are split between June and August. The latter meeting will also bring new forecasts, which could tip the balance in its favour. After the March BoE meeting, market pricing indicated 0.75 percentage points of cuts in 2024, but if inflation falls faster than expected, the easing could be even more dramatic. Forecasts from Capital Economics suggest that the base rate will fall below 4 per cent by the end of the year, and to 3 per cent by 2025.
3. Consumers feel better off
In the last BoE meeting, some rate-setters worried wage growth (at more than 5 per cent) was still ‘too high’. Though a headache for policymakers, this should leave households feeling better off. In March’s full-year results, retailer Next (NXT) said that the consumer environment looks “more benign” than it has for years, and attributed this to UK wages rising faster than inflation again.
4. The UK recession is (probably) behind us
We won’t know if the recession is technically over until quarterly gross domestic product (GDP) figures are released in May. But the monthly data looks encouraging. January GDP (the most recent available) was encouraging: according to analysis from Pantheon Macroeconomics, it showed last year’s recession “will prove fleeting”.