It’s party season, but there’s not much of that in the air for reasons we all know. But should this sense of gloom apply to economics and finance, as well as geopolitics? It is easy to make it so.
At best there has been very slow growth in the UK and Europe. Real incomes may be rising, but only after falling significantly earlier in the year.
UK share prices have remained flat, with the FTSE 100 index rising just 2 per cent over the year, a significant decline allowing for inflation.
TAX CUTS: Jeremy Hunt is understood to be considering tax cuts for 2024
Taxes as a share of GDP are expected to reach their highest level since 1949, but the quality of government services is uneven at best.
There have been all these strikes, and on top of that, there is the risk of recession next year. It feels more Scrooge than Santa.
But is this true? Of course, Christmas is also a time to count our blessings, and there are many.
But more importantly is the growing evidence that the UK economy is at something of a turning point, and as next year progresses, we will all become more aware of the positives and less affected by the rest.
The blessings include unemployment, the lowest it has been since the 1970s, and thus the lowest levels in almost everyone’s working lives. The average household wealth is £302,500, so it’s not just the rich, people in the middle class are well off too.
Income inequality has been broadly stable since the early 1990s, and figures from the Office for National Statistics show it is just below its peak in 2008 under the last Labor government – and not many people realize this.
Of course, our blessings should include elements that don’t count in financial terms, including better health than ever before. Nothing is perfect, but we need a sense of proportion. Now look ahead. The big change we will see next year is the disappearance of inflation.
vanishement? Well, not quite, but just as the Bank of England dramatically underestimated the pace of the increase, it is now making the same mistake in reverse.
Private sector forecasts, such as Pantheon Macroeconomic Forecasts, suggest we will return to 2 percent by the summer. This would pave the way for lower interest rates.
In fact, this is what the markets actually offer. I’d rather talk about the importance of the 10-year government bond yield, but it really matters because it affects all long-term borrowing costs.
In October, the percentage exceeded 4.5 percent. Last week, it dropped to 3.75 percent, and on Friday, it dropped to less than 3.5 percent. It is amazing. I can’t remember there being such a rapid decline in the cost of long-term borrowing as there has been in the last few weeks, and this will fuel the entire economy next year.
We will see it in all kinds of ways. House prices will recover. It may drop a little more but by the summer it should be climbing and by the end of the year it should be back to its all-time peak in the fall of 2022.
This will increase consumption, because when we move house, we always have to buy things to put in the new place.
There is room for that. Household savings are much higher than they have been for most of the past 20 years, which indicates that when people become more confident in their ability to spend more.
Since household consumption makes up by far the largest proportion of GDP, more than 60 percent, this goes directly to economic growth.
Cuts: Interest rates are likely to be cut next year, bringing better news for borrowers
growth? Well, there were the dismal GDP numbers last week, but given the ONS continues to revise its amounts, I really think we should take all these stats with a pinch of salt and look at the real data instead.
Businesses are hiring at all-time highs, and they would not have done so if they expected a recession next year.
Tax revenues are very strong – even very strong for those of us who pay our income tax bills before January 31 – which means the economy should be fine.
In any case, forward-looking data such as the UK PMI point to modest growth in the coming months.
It is always difficult to translate broad economic and fiscal forces into what will happen to the real economy, but I believe intuitively that 2024 will be a year of two halves.
The first half will be one when there is still a lot of uncertainty.
But once the Bank of England eases interest rates and the Chancellor of the Exchequer starts cutting taxes, the second half will be brighter. Oof.
DIY investment platforms
AG Bell
AG Bell
Easy investment and ready-made portfolios
Hargreaves Lansdowne
Hargreaves Lansdowne
Free money trading and investment ideas
Interactive Investor
Interactive Investor
Fixed fee investment from £4.99 per month
eToro
eToro
Investment share: 30+ million community
Best investment
Best investment
Free financial training
Affiliate Links: If you get a product, we may earn a commission. These deals are selected by our editorial team, because we think they’re worth highlighting. This does not affect our editorial independence.
Compare the best investment account for you
Some links in this article may be affiliate links. If you click on them we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.