In a detailed report, Goldman Sachs Research has highlighted the evolving dynamics of the UK economy, aligning it with other developed markets in several key areas. The report, “UK Outlook 2024: Not So Different After All,” authored by Chief European Economist Jari Stehn, anticipates a modest improvement in the UK’s GDP growth in 2024. This projection is more optimistic than consensus forecasts, suggesting that the UK, along with other major global economies, might surpass expectations.
Goldman Sachs Research indicates a potential easing of economic headwinds in the UK. A notable increase of approximately 2.5% in real disposable income is expected in 2024, attributed to decreasing headline inflation and sustained wage growth. The impact of the Bank of England’s interest rate hikes is likely at its zenith, with a gradual decline forecasted throughout 2024.
Fiscal policy, particularly the phasing out of Covid and energy support measures, is predicted to dampen growth in the next year. However, the fiscal impact on GDP growth is expected to lessen marginally. Goldman Sachs Research forecasts a gradual GDP growth throughout 2024, with an overall expansion of 0.6% by year-end, exceeding the Bank of England’s forecast.
The labor market has undergone significant changes, with a notable reduction in the jobs-workers gap. This adjustment, initially driven by a decrease in job vacancies, has been further influenced by a rise in unemployment rates. Compared to the US and euro area, the UK has made greater strides in addressing post-Covid labor market imbalances.
Wage growth shows signs of slowing, with sequential wage growth projected to drop to around 4.5% by the end of 2024. This trend is expected to continue as inflation decreases and the labor market stabilises.
Inflation metrics have also shown significant improvement, driven mainly by a decline in core goods inflation. Goldman Sachs Research predicts a continued, albeit slower, disinflation process, forecasting headline and core inflation at 2.6% and 2.8% year-over-year by the end of 2024, respectively.
Interest rates are likely to remain steady, mirroring the trends of the Federal Reserve and the European Central Bank. Rate cuts are anticipated in the third quarter of 2024, slightly earlier than those expected by the Federal Reserve.
Despite these positive developments, the UK economy is projected to lag behind the US and euro area in several aspects through 2024. Challenges include persistently higher inflation and a more sensitive mortgage market. Long-term sickness post-pandemic and workforce shortages, exacerbated by post-Brexit conditions, further constrain the UK’s labor market. Goldman Sachs Research estimates the structural unemployment rate at around 5%, higher than the Bank of England’s estimate.
The growth-inflation tradeoff for the UK is less favourable compared to other developed markets, with a lower growth forecast and higher expected core inflation. The Bank of England faces a complex task in navigating these conditions, with a small probability of rate hikes in early 2024, followed by likely rate cuts to stimulate growth.
In terms of public finances, the UK’s situation is broadly similar to that of the US and euro area. The debt-to-GDP ratio has risen significantly, and while deficits remain large, there are plans to improve the budget balance. However, challenges such as a higher share of inflation-indexed bonds and potential fiscal losses from the Bank of England’s Asset Purchase Facility, coupled with increased foreign investor participation in the debt market, limit the scope for fiscal support in 2024.
In conclusion, while the UK economy shows signs of alignment with other developed markets in certain areas, it faces unique challenges that may hinder its performance relative to its peers in the coming year.