Mairi Spowage, Professor of Practice and Director of the Fraser of Allander Institute, believes it will be a more conventional year for growth in the economy
Hopes for 2024 after a year of stuttering economic performance? It has felt a bit like economic gloom has been ubiquitous during 2023, with successive hopes of returning to more normal times of growth continually dashed as high inflation continued to take its toll on consumers and businesses.
2023 is likely to be shown to end as a year that showed very little growth. The latest data available for Scotland at the time of writing shows the cumulative growth over the whole of the year to date has been flat (we’ve seen zero growth over the course of the year). The monthly profile shows a volatile and stuttering picture, with data at the UK and Scottish level sometimes being driven by public sector strikes impacting on the volume of services that can be delivered and having a huge impact on the headline rate.
At a sectoral level, a strong construction sector has been outweighed by contractions in manufacturing and other production sectors, with growth in the dominant service industries lagging performance at the UK level. Inflation has also come down slower than was expected – although, as we know, the Prime Minister was able to meet his pledge of halving inflation by the end of 2023. The latest inflation data for December did show a surprising uptick, rising slightly from 3.9% to 4.0%. Of course, we shouldn’t get too focussed on such a small increase, which could easily disappear in future releases when new data is incorporated into the series. But it is symbolically important, as it is the first increase in the annual Consumer Price Inflation (CPI) rate since February 2023 – and it confounds the expectations that most analysts had that the rate would continue to fall.
The good news in this data is that food inflation continues to come down – although it is still running at 8.0% (and everyone needs to remember this still means prices are rising considerably, just a bit less quickly). This was more than offset by increases in alcohol and tobacco prices, transport (caused by car repairs) and ticket prices for cinema, theatres and concerts. So what might this mean for the Bank of England’s interest rate decisions? Much of the optimism for growth in 2024 is dependent on what the members of the Monetary Policy Committee choose to do during the year, and we all watch with interest what they will do on 1st February.
It is worth saying that the volatile movements of goods inflation – much of it driven by external factors which are well rehearsed – are less likely to dominate their thinking than the much more persistent and sticky services inflation. Services inflation is lower than in was during the course of 2023, but is at a similar level to the same period in 2022. The stickiness of services inflation shows the difficult position that the Bank of England still faces. Inflation has remained stubbornly high in the UK compared with similar economies, and it is clear that there is still a significant level of domestically generated inflation in the system in the service sector.
While average earnings are growing more slowly than earlier in the year, they are still growing quite fast relative to historical levels. Worries about a wage-price spiral are what has driven many of the interest rate decisions we saw over the course of 2023, despite the headline inflation rate falling.
External events may also play their part in the view the Bank takes in early February, as significant disruptions to international trade flows we have seen over the last couple of months intensifying, which will feed through to the prices we all pay for goods and services. This may lead the Bank to be more cautious about jumping to rate cuts in their first couple of meetings in 2024, despite market expectations.
There is good news to be found in the economic data, which gives us some hope as we go forward into 2024. And this is not just that, despite the lack of growth in 2023, we have at least avoided a technical recession in Scotland during the year (as we and many other analysts were predicting this time last year). Lower inflation rates have been felt right across the income distribution. At the peak of inflation in late 2022, the inflation rate experienced by the lowest-income households was approximately two percentage points higher than that experienced by the highest-earning households. These rates have now come into line as inflation has fallen – driven mostly by the falls in the price of food and energy relative to the peak in prices. Lower-income households spend a much greater percentage of their income on these essentials, so are much more exposed to changes in prices. We have also seen growth in earnings converge across the distribution, with some catch up evident in those in the lowest incomes.
Overall, although it remains weak compared to pre-pandemic levels, consumer sentiment has risen for the third quarter in a row. Despite the severe cost of living crisis still impacting most households, this slow but persistent movement towards positive territory for household finance and spending measures is an encouraging sign for the year ahead. After a difficult end to 2023, businesses are also optimistic about 2024, with most businesses expecting an increase in activity over the first half of 2024. The likelihood of interest rate cuts over the course of the year is, of course, an important part of that, so many are waiting for February 1 with interest.
In our next survey of businesses, we will be exploring views on the recent fiscal announcements by the UK and Scottish governments – and get a feel for the expectations businesses have about the forthcoming general election and the policies they would like to see.
2024 will be a busy year for politics – but hopefully a more conventional year for growth in the economy.
The Fraser of Allander Institute produce a quarterly economic commentary – see the latest edition at https://fraserofallander.org/research/fai-economic-commentary/
Are great expectations due for Scotland's economy?
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02.02.2024
Mairi Spowage, Professor of Practice and Director of the Fraser of Allander Institute, believes it will be a more conventional year for growth in the economy
Hopes for 2024 after a year of stuttering economic performance? It has felt a bit like economic gloom has been ubiquitous during 2023, with successive hopes of returning to more normal times of growth continually dashed as high inflation continued to take its toll on consumers and businesses.
2023 is likely to be shown to end as a year that showed very little growth. The latest data available for Scotland at the time of writing shows the cumulative growth over the whole of the year to date has been flat (we’ve seen zero growth over the course of the year). The monthly profile shows a volatile and stuttering picture, with data at the UK and Scottish level sometimes being driven by public sector strikes impacting on the volume of services that can be delivered and having a huge impact on the headline rate.
At a sectoral level, a strong construction sector has been outweighed by contractions in manufacturing and other production sectors, with growth in the dominant service industries lagging performance at the UK level. Inflation has also come down slower than was expected – although, as we know, the Prime Minister was able to meet his pledge of halving inflation by the end of 2023. The latest inflation data for December did show a surprising uptick, rising slightly from 3.9% to 4.0%. Of course, we shouldn’t get too focussed on such a small increase,........
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