Deutsche Bank analysts have pointed to prospective interest rate cuts, subsiding inflation, and real wage growth as reasons to be optimistic about the UK economy heading into 2024.
“It's hard for economists to be too optimistic at the start of any year,” the bank said in a research note.
“But the new year brings some optimism and in the spirit of new beginnings, we look at eight things that add a silver lining to the economy in 2024.”
Deutsche’s reasons to be cheerful this January:
- Subsiding inflation
- Falling energy bills
- Tax cuts
- Real wage growth
- Prospective interest rate cuts
- Better than expected public borrowing
- Optimism on house prices
- Lack of recession
Larger than anticipated drops in the prices of demand-sensitive goods and services have contributed to the recent weaker momentum of inflation across the board, the bank said, “not just energy and food”.
Alongside this, household energy bills are expected to drop by as much as 15% in April, with reductions prompting savings of between £10 billion and £15 billion throughout 2024, as per Deutsche.
Though this is dependent on gas prices, Deutsche said the absence of any further shocks could also see inflation reach the Bank of England’s 2% target as early as April as a result and average 2.7% over the year.
“We continue to think that the Bank of England has overestimated the persistence in price pressures,” analysts noted, adding rate cuts could kick off in May.
Just how far interest rates might fall remains hard to predict but the bank suggests that a reduction of 75 basis points could be likely this year, stretching to 125 basis points based on public sector pay and unemployment.
That said, real wages should continue to climb this year, according to the bank, constituting an above-inflation increase of 1.75% across the board, driven by a higher national living wage and private sector pay.
A looming general election and better-than-expected public borrowing figures could also leave room for cheer this year.
Aside from cuts to national insurance announced in November’s autumn statement, further tax reductions could be in store this spring as the conservative government looks to secure votes ahead of next year’s general election, Deutsche said.
At £124 billion, the Office for Budget Responsibility might have overestimated net public borrowing for this financial year by £5 billion, the bank added.
Such certainty returning to the economy, particularly on inflation and interest rates, could drive a recovery in the housing market, Deutsche added.
Though prices are expected to fall into the first quarter of 2024, new buyer inquiries already appear to be recovering.
Given such improving metrics, Deutsche said a gradual rebound in prices could occur from as early as spring.
“Indeed, stronger real wage growth, stronger household and business balance sheets, some additional fiscal loosening, and still relatively strong business investment, will likely keep the economy afloat this year,” the bank said.
“Put another way, while headwinds remain strong, we think tailwinds are gathering momentum.”