10 June 2024

 

 

  • How to boost the economy?
  • Pay growth and rate call
  • Wet weather dampens GDP growth

How to boost the economy?

I’ve spent the last two weeks talking about how the election is unlikely to make much difference to the economic outlook given the similarities between the two parties economic policies and the constraints of the fiscal situation that any new government will inherit. But there are a number of ways a new government could boost the economy, especially if we start to look over a five-to-ten-year horizon.

Stability

A period of political stability with consistent ministers and policies should bring some much-needed certainty to businesses decision making, which would feed through into business confidence and eventually a boost to investment.

Investment

It is well known that the UK invests far too little, and this is one of the key reasons why UK productivity is so lacklustre. One reason for poor investment is the UK’s restrictive planning laws, so reform here could give a substantial boost to long-term growth. In addition, a significant increase on spending on green investments could add to a revival in the construction industry. However, it will take a while for these policies to be seen in the growth numbers. Even if the planning system were dramatically improved on the first day of a new government, it would be years before new housing and infrastructure could be completed. The benefits would probably be seen in the next parliament.

Labour market

The other big problem facing the UK economy is a dearth of workers. Policies to get people back to work, either through training, taxes or more assistance with childcare could add to the workforce. However, there are risks here as well. Efforts to reduce NHS waiting lists and improve training for workers could be very expensive with limited results. And there is a risk that efforts to give workers more power end up removing more flexibility from the jobs market than is necessary. That could lead to labour costs increasing, which would translate into higher inflation and unemployment than would otherwise have been the case.

Migration

After hitting record highs in recent years, net migration is now falling and should continue to do so in the future. The risk here is that the new government moves to bring inflows down faster, that would be another negative hit to labour supply.

Europe

While both parties have ruled out rejoining the EU and even a significant renegotiation of the treaty seems unlikely, a more amicable relation with the EU could be a serious tailwind for growth in the long term. Most estimates suggest that the trade hit from Brexit will shave off 3% from GDP over the long run so any steps to remove trade barriers, including a high-alignment deal floated in the media, could, in time, cushion the blow to the economy.

So, while we still doubt the election will have much impact on the outlook for growth over the next year or two, the policy choices that the new government makes now will have a significant impact on growth over the next five to ten years for better or worse. 

Pay growth and rate call

The upcoming batch of labour market data will be an uncomfortable one for the Bank of England (BoE), though we don’t think it will derail its plans to cut rates soon.

We expect private sector pay gains to hold steady at 5.9% in the three months to April, as the near 10% increase in the national minimum wage adds to pay pressure. Regular whole-economy wage gains will tick up to 6.1% over the same period, from 6% previously.

The sticky pay print will be an awkward one for the BoE. On an underlying basis – three-month-on-three-month annualised – private sector pay growth is likely climb to around 7%, well above the 3% level that’s consistent with the 2% target.

That shouldn’t derail the BoE’s plans to cut rates soon. The underlying trend in wage growth is down and better news is likely to come over the coming months as pay settlements are made against a backdrop of inflation close to 2%. Forward-looking indicators also point to slower pay growth ahead.

What’s more, the central bank seems to be placing greater weight on services inflation, which we expect to slow in coming releases, than on pay data. Our base case is the first move down in interest rates will still be in August.

Elsewhere, we expect the unemployment rate to hold steady at 4.3%. A low response rate continues to affect the Labour Force Survey, despite recent improvements.

Wet weather dampens GDP growth

April’s monthly GDP print is likely to suggest the pace of economic activity is cooling.

We expect output to have expanded by only 0.1% in April, following a 0.4% gain previously. That’s consistent with weaker signs coming out of high-frequency indicators like the PMIs and retail sales.

Forgive us for talking about the weather, but April was another horrendous month. Rainfall was 68% above the 1970-to-2023 average, making it the wettest April for 12 years. That hit retail sales hard and probably impacted construction as well. 

But all the signs are that things picked up again in May. Our baseline forecast is for GDP growth to slow over the current quarter to 0.4%, after the strong 0.6% increase in the first three months of the year.

Sign up to our Real Economy communications for regular commentary and analysis from Tom on the changing economic landscape.

Subscribe to The Real Economy 

You will be first to receive all our Real Economy content including topical reports and insights into the Middle Market Business Index.

UK quarterly economic outlook

Our quarterly economic outlook analyses the conditions of the driving force behind the UK economy, the real economy.

The Real Economy

The Real Economy offers an accurate and current reflection of the middle market to help businesses anticipate and address the issues and challenges they face in todays economy.