August brought us the first Bank of England base rate cut since March 2020 … Were you jumping for joy or quietly cautious?
These events can never be looked at in isolation and understanding what projections for inflation, GDP, the labour market, etc are critical to inform what might happen with interest rates. Now, I’m no expert economist but here are few aspects it’s worth keeping an eye on before any celebrations are made:
- Inflation has returned to its target level of 2% and remained stable for a couple of months – a good sign … BUT services inflation remains stubbornly high, and it’s likely inflation will increase in the latter part of 2024 before returning to the 2% level once again.
- GDP growth was stronger in Q2 of 2024 than expected which in turn can push inflation up. So perversely, not always a good thing for our economy…
- Longer term growth projections are on the up, but it’s sluggish growth over the next 2-3 years – ‘uninspiring but positive growth’ is what’s being heard!
- Global growth for UK products is shifting away from the US and more to the EU.
- Domestic consumer growth is critical for a positive economy – and that is a tough market currently: there’s still a downward spending growth impacted by high interest rates. The increase in wages helps elevate this and confidence appears to be on the up, so that’s positive but it is only mild growth expected over the next couple of years.
- Business investment is expected to follow the same mild growth path, though the Budget in the Autumn 2024 will be critical for business decision making.
- The labour market remains tight but is loosening; recruitment challenges and the reduced number of vacancies continue to have an impact. The upside is that pay awards are starting to fall back in line with inflation which should help ease pressure on pay negotiations.
So with all of the above, what does that mean for the UK economy and interest rates? We’re not out of the woods yet is the short answer! The markets are suggesting that interest rates will continue to fall through 2024 and may even get to 4.5% by the end of the year. There is however no guarantee …. watch this space!