In 2024, the UK economy will be a mix of positive growth and concerns. Many people are left wondering: is this an upswing that can last or just a temporary one?
A closer look at the situation reveals that, while there has been a remarkable recovery from recent economic difficulties, it is possible to find vulnerabilities which could threaten this progress.
Understanding the UK’s economy requires a number of factors, including the retail performance of retailers during the Euros men’s football tournament and political uncertainties.
Economic growth: strong numbers but how long will they last?
The UK economy grew strongly in the first half 2024. It outpaced its G7 counterparts and offered a glimpse of hope of a sustained recovery.
Office for National Statistics reported that the GDP increased by 0.7% in the first three months, and then 0.6% in the second. This is a significant economic improvement compared with other large economies such as the U.S.A., Japan, or Germany.
The Bank of England is cautious, however, about whether this trend will continue. Business surveys indicate that despite these positive figures, the economy may not be quite as strong as it seems.
Growth in the first six months of this year may be a symptom of deeper problems, including labor market restrictions and an ongoing productivity issue, that could hamper the ability of the economy to sustain its current pace.
Retail spending is boosted by football’s efforts
Retail sales in July were up significantly, giving the industry a boost after a slow June. ONS reports a 0.5% rise in retail sales, driven largely by spending tied to Euros and the summer discounting that brought shoppers back onto the high street.
This apparent retail recovery, however, is not as simple as it appears. Sales volumes were 0.8% lower in February 2020 than they had been before the pandemic.
The recovery has also been uneven across all retail sectors. The Euros benefited department stores, sports shops and clothing retailers. However, the sales volume of clothing retailers fell by 0.6%.
The mixed results indicate that, while confidence is improving, it remains low, especially in the sectors dependent on discretionary expenditure.
What is the outlook for inflation and interest rate?
The UK has experienced a rise in inflation over the last two years. However, recent months show signs of improvement. Inflation has eased since 2022, and is now around BoE target of 2%. The BoE’s target of 2% was slightly overshot in July. However, wage growth outpaced the inflation rate by a wide margin during the second quarter.
As a result, earlier this month the BoE lowered interest rates from their 16-year peak. The BoE’s move is intended to encourage continued consumer spending and economic growth.
The BoE is cautious, however. Cutting rates too quickly could lead to inflation. This would be especially true if the economic growth exceeds levels that are sustainable. It also highlights the continued uncertainty in the UK’s economy.
New government, same challenges?
Keir starmer’s Labour Party has recently won a majority in the UK. This brings a new dynamic to the UK economy. Starmer’s Government has pledged to “take off the brakes” in Britain by implementing economic reforms that will boost growth and address long-term challenges. This includes changes in planning regulations as well as efforts to increase participation on the labour market, especially after the significant reductions of workforce following the pandemic.
These initiatives may be ambitious but they also need to address deeply rooted problems such as under-investment and low productivity, which are exacerbated due Brexit and the global economic uncertainties.
To achieve sustained high growth, it is necessary to take a more comprehensive approach in addressing the structural problems that have been affecting the UK’s economy for a long time.
What is this for investors?
The UK economic data for 2024 presents both risks and opportunities to investors. Retail sales are resilient in some areas, such as department stores, sports equipment, and the strong GDP growth. This suggests consumer-oriented sectors may offer good investment prospects.
Businesses that are able to adapt to changing consumer behavior, especially in an economy recovering, could be in the best position for growth.
It is important to note that the discretionary expenditures are shrinking not only in the UK, but also across Europe. This trend has been highlighted in recent drops in luxury and clothing goods sales.
In this climate, sectors that are tied to essential consumer goods may do better.
Sectors sensitive to high borrowing costs such as finance and housing could benefit from the BoE’s prudent approach.
The slow rate of reductions suggests investors remain patient and wait for further positive evidence before taking any significant action.
The new government may also be able to benefit from reforms in sectors such as construction and infrastructure. However, it will take some time for these effects to become apparent.
Investors would do well to wait and not jump ahead, despite the growing optimism about the UK’s economy.
The UK economy is showing encouraging signs for recovery in 2024, but the BoE’s underlying concerns and uneven retail growth indicate this isn’t the right time to be complacent.
UK investors and citizens have good reason to feel optimistic.
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