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Should we be more hopeful about the UK economy?
According to the EY Item Club, there is a good chance the UK economy is now in a technical recession. What is a technical recession, you might ask? Well, a technical recession requires two consecutive quarters of GDP contraction, something the Item Club believes may already be under way.
But it’s not all doom and gloom for the UK economy. The article (which you can find here) also pulls out a few interesting causes for optimism, and in the interest of sharing some light on this dark winter’s day, we take a look at some reasons to be hopeful this year. Let’s dive in.
Inflation beaten back
Ever since Russia’s invasion of Ukraine and the ensuing energy crisis, the world has been in the grip of a damaging inflationary cycle. The Bank of England (BoE) and central banks around the world responded by raising interest rates, which in turn strained household budgets and threatened businesses.
Having reached more than 10%, inflation could soon fall below the BoE’s 2% target, with rates falling as a result. EY predicts headline inflation will fall to 2% by May, easing the pain for many stretched businesses.
The obvious caveat to all this is the risk of black swan events wreaking further havoc. The crisis in the Red Sea is a threat to supply chains, while conflict in the Middle East continues to loom large. However, while it’s too early to declare defeat over inflation (central bankers have spent a lot of breath repeating this point ad nauseum) there are promising signs that its worst effects are behind us.
Investment up
One thing the UK desperately needs more of is business investment. Recent years have seen that particular well dry up, but there is hope that an influx of cash is on the horizon.
If interest rates are cut, EY expects the flow of business investment to resume. Longer term factors like changes to business taxation and a shift towards new industries – such as AI and life sciences – could become key drivers of investment. Business investment is expected to grow by around 3% in 2025 and 2026, notably above where gloomy projections put it last year.
It comes at an important time, with the United States going full protectionist with its package of tax cuts and environmental subsidies. All parties seem to agree that the UK must act to mount a coherent defence to a shifting global power balance. Positive developments could soon be on the horizon for the UK.
Growth returns
With a pinch of luck, the UK economy could soon pivot back to growth, easing the burden on businesses up and down the country. EY increased its GDP projections slightly, while the Bank of England and even Downing Street seem to be feeling happier about the future.
If the UK were to avoid the widely-predicted recession, it would be a remarkable act of economic contortionism. There is certainly enough to keep us hoping as we look ahead to 2024.
As global economies look to the future, it’s always hard to predict where currency markets will move. Don’t be fooled by the experts – there’s often little rhyme or reason to why FX moves up, down, sideways or diagonally.
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