- Insights
TBA’s latest news – 22th of January 2024
UK Economic Growth Set to Rebound by End of 2024
The UK economy is set to rebound by the end of 2024, according to Simon French, chief economist at stockbroking firm Panmure Gordon. Despite concerns of a recession last year and weak Christmas shopping data, the economic outlook for the UK has seen a “significant improvement” over the past 12 months.
EY Item Club, sponsored by accounting firm EY, points out that interest rates are expected to drop from 5.25% to 4% by the end of this year. Martin Beck, the club’s chief economic advisor, states, “While the UK could still face a technical recession in the fourth quarter of 2023, the mood music around the economy is undeniably improving. High inflation and costly borrowing have been major hurdles for growth recently, but with encouraging signs of these issues receding, the outlook for late 2024 and beyond seems brighter.”
However, he also warns that predictions could still be affected by global events. “Ongoing geopolitical tensions could drive up energy prices, potentially slowing the decline of inflation and increasing costs for households and businesses. Moreover, although the Bank of England is expected to cut interest rates this year, the timing and extent of the cuts remain uncertain, and prolonged high interest rates could extend financial pressures. The first half of 2024 should tell us much about the UK’s prospects for mid- to long-term growth recovery.
According to a study by a leading forecasting agency, the UK economy will benefit from falling inflation and reduced interest rates in the second half of this year, boosting growth and enabling the government to offer pre-election incentives.
Chancellor of the Exchequer Rishi Sunak and Finance Minister Jeremy Hunt indicated last week that the March budget statement might include tax cuts, following through on promises made in the Autumn statement last November and implemented on January 6.
If the economic recovery proceeds as expected, further tax cuts might appear in the Autumn statement of 2024, ahead of the anticipated general election by the end of the year. The report dismisses the likelihood of a recession in the latter half of last year and a further three-month negative growth in the first quarter of 2024, suggesting that signs of economic recovery will soon take effect.
The company raised its 2024 GDP growth forecast from 0.7% to 0.9% in its Autumn forecast, while the UK economy is now expected to grow by 1.8% in 2025, higher than the 1.7% forecast in October. Last year’s growth rate was revised down from 0.6% to 0.3%, highlighting weakened growth momentum in the latter half due to persistent high inflation and sharply rising interest rates.
However, a recession is still possible if the economy, after contracting by 0.3% in the third quarter, shows growth in the fourth quarter of 2023. Several economists last week stated that an unexpected 3.2% drop in December retail sales, indicating weak consumer spending, could drag down the economy in the fourth quarter. Financial markets anticipate improvement once the inflation rate, averaging over 6% in 2023, drops to 2% as expected in April, and the Bank of England starts cutting rates from June.
A Lloyds Bank report found that in December 2023, 7 out of 14 economic sectors reported an increase in demand, measured by new orders, more than twice the number in November 2023. A rebound in the sluggish real estate market, high levels of demand for air travel and vacations, and rising disposable income after a prolonged period of recession are considered reasons for boosting business confidence. The report states, “Business optimism reached its highest level since May, with 12 out of 14 industries reporting higher confidence in their output prospects for 2024 compared to the same period last year.”
Data Shows Average Profit of £102,000 for Homeowners Who Sold Last Year
Despite a decline in house prices last year, homeowners in England and Wales who sold their properties in 2023 averaged a net profit of £102,000, according to the latest data.
Data released by the estate agency Hamptons indicates that, although the UK property market faced several challenges in 2023, years of strong price growth meant that those who sold their homes last year generally realised substantial profits, or significant capital for their next purchase.
According to Nationwide Building Society, UK house prices fell by 1.8% in 2023. The Office for National Statistics reported last Wednesday that as of November, the typical value of a UK property had dropped by 2.1%—the largest annual decrease since 2011.
Hamptons noted that an analysis of Land Registry data revealed that the average net gain for a household in England and Wales that bought in the past 20 years and sold in 2023 was £102,650, equivalent to 48% of their paid price. This is the second-highest figure on record. Overall, 93% of households sold their properties for more than their purchase price, with an average ownership duration of just under 9 years.
Aneisha Beveridge, Head of Research, said: “Most of these gains are reinvested back into the property market for purchasing another home, so they are rarely cashed out. However, these figures indicate that last year’s historic price rises protected movers, releasing cash to cover moving costs.”
The data also shows a surge in the number of households selling their homes after just two years. Among those who sold in 2023, about 8% had bought their properties in 2021, with these properties “disproportionately likely” to be in rural, town, or suburban areas. In contrast, the proportions of 2022 and 2019 sellers who had bought two years earlier were 5% and 6% respectively, suggesting that a significant portion of those who moved to rural, small town, or coastal areas during or after the pandemic later changed their minds.
As house price growth in the capital slows down, sellers in Wales are now seeing a larger percentage gain than those in London. In 2023, the average selling price in Wales was 53% higher than the purchase price, compared to 51% in London.
Within weeks of the first COVID-19 lockdown in March 2020, estate agents reported a surge in potential buyers planning to leave cities for rural areas, small towns, or coastal regions—usually places with larger gardens, closer to open spaces, or offering more space for working from home. This so-called ‘space race’ continued into 2021.
Previous research indicated that some who bought properties during or just after the pandemic later regretted their decision. A survey of people who moved in 2022 found that 12% felt they had rushed their decision and now regretted it, while another 15% were dissatisfied and contemplating moving again.”
Finance Minister Jeremy Hunt Hints at Further Tax Cuts
During the World Economic Forum in Davos, Switzerland, UK Chancellor of the Exchequer Jeremy Hunt explicitly stated his inclination towards further tax cuts in the upcoming spring budget, suggesting that lower taxes have a positive impact on the vitality and rapid growth of the economy.
Mr. Hunt had already reduced National Insurance for workers by 2% in the autumn budget, along with announcing cuts in business taxes. If inflation rates decrease, leading to lower interest rates, Hunt may see more room for additional tax cuts. He argued that countries with lower taxes have more competitive and vibrant economies.
Mr. Hunt stated, ‘The direction of travel shows that economic growth in other regions is faster than in the UK, and North America and Asia generally have lower tax levels.’ He believes that economies with lower taxes are more dynamic, competitive, and able to provide more funding for public services like the National Health Service (NHS).
While Mr. Hunt did not provide detailed information on the scale of future tax cuts, it is widely expected that he will address income tax issues in the budget on March 6. Currently, the overall tax burden has reached its highest level in decades, as households are pushed into higher income tax brackets while the tax threshold remains at the same level.
In discussions about inflation, Hunt expressed confidence that inflation will continue to decrease, and prices are ‘moving in the right direction.’ Lower inflation is expected to create conditions for the Bank of England to lower interest rates more quickly, while reducing government spending on substantial debt interest payments.
Despite the ongoing risk of an economic recession in the UK, Hunt firmly believes that the rapid decline in inflation is one of the signs of improvement in the UK economic outlook. He emphasised that ‘it is too early to know how much we can cut taxes now,’ but the trend of rapid decline indicates that the UK economy is moving in a positive direction.
New Round of Price Increases by UK Water Companies
Eleven water supply companies in England and Wales are gearing up to announce new household water charging standards by the end of January, set to take effect from April. The average increase in bills will be revealed by Water UK in early February, following last year’s £31 rise, reaching £448.
This announcement is likely to trigger a new round of criticism as the industry faces anger over issues such as sewage discharge, executive pay, debt levels, and massive dividends.
When setting the new charging standards, water companies need to consider both customer affordability and whether their already damaged reputations can withstand the backlash from the bill increases. Simultaneously, they are required to invest significant funds in infrastructure to repair leaking pipes and enhance water resource management in response to the climate crisis. A £10 billion plan committed to improving infrastructure to combat pollution has been delayed and may ultimately be funded by taxpayers.
Analyst Martin Young from Investec stated, “There are some catch-up elements here.” He added, “The challenges facing the water sector are evident to all. Historically, the sector has been a priority for legislation, so we hope to see some overdue investment.”
The specific magnitude of the price hikes will be determined by several factors. One significant driver is the increase in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) data in November, which is used to calculate the industry’s annual bills, showing a rise of 4.2%.
Furthermore, regulatory body Ofwat allows companies to charge higher fees if they meet pollution, leakage, and customer service targets. In September of last year, Ofwat instructed 12 underperforming companies to reduce a total of £114 million in bills from April, including a £101 million reduction from heavily indebted Thames Water. In contrast, Severn Trent was allowed to increase its bills by £88 million.
Insiders revealed that almost all suppliers are planning to raise water fees, with most following the November inflation data or higher. It was suggested that Hafren Dyfrdwy, a water company in North Wales, is expected to face the largest price increase, while Welsh Water might be the only supplier reducing water fees due to penalties incurred in the previous fiscal year for supply interruptions and leaks. Insiders also noted that the rate of increase for the UK’s largest supplier, Thames Water, might be lower than the inflation rate. However, the assessment of its consumption data is challenging due to issues with the rollout of its smart meters.
In 2019, as part of a price review occurring every decade, limits were set on the amounts companies could charge. After some companies lodged objections with the Competition and Markets Authority, Ofwat’s subsidies became more generous. The upcoming charges will apply to the final year of the current pricing period, and the regulatory body is currently examining business plans covering 2025 to 2030, providing detailed explanations of the anticipated cost increases for future plans.”
The Average Loss Per Capita in the UK Reached £10,200 Since 2010
A report revealing the dangers of excessive reliance on the fossil fuel industry during the climate crisis shows that the overall well-being of Aberdeen residents has decreased by £45,000 since 2010. This region has experienced the worst economic growth performance in the UK over the past decade.
The Urban Centre issued a warning, stating that after years of sluggish economic growth, various regions in the UK have been “flattened,” and Scotland’s oil and gas capital has lost most of its standing among the 63 UK towns analysed in the report.
Aberdeen, once among the UK’s most prosperous areas, saw a decline in the past decade. Its export base, contributing about a third of direct employment opportunities and primarily linked to the oil and gas sector, faced losses due to the energy industry’s downturn resulting from the US shale oil revolution. This granite city’s struggles highlight the risks associated with excessive dependence on an industry facing global change.
The Urban Centre pointed out that since the Conservatives came to power in 2010, progress across the UK has almost stagnated, leading to people’s spending or savings being on average £10,200 less than it would have been if it had continued to grow in line with trends before 2010.
However, conditions vary between different towns, with Aberdeen’s situation being more than four times worse than the national average.
Residents of Burnley also faced financial difficulties, with a per capita income reduction of £28,090, while Cambridge and Milton Keynes saw a per capita income decrease of £21,000.
The report emphasised the prosperity and decline trends in Aberdeen, stating that the city’s per capita disposable total income was on average £45,240 lower than it would have been if the local economy had continued to grow at the pace from 1998 to 2010. Paul Swinney, Director of Policy and Research at the Urban Centre, described it as “a disastrous decade that started with an overreliance on one industry.” He added, “All of this stems from an excessive dependence on one industry, creating a chain reaction.”
The report found that while an estimated 9,000 jobs were lost in the oil and gas-related sectors, this might have affected the city’s spending and caused harm to other areas. Employment in the city’s retail sector declined by 30%, while national retail employment decreased by 6%. Property prices were also impacted, with a 3.4% increase in 2022 compared to 2010, while the national average rose by 50%.
