Economists often predict recessions.
Pessimism is inherent, I suppose, when dealing with the ‘dismal science’. The past few years have been no exception. This time last year, forecasters predicted an 90% probability that the UK would be in recession by now. Yet, the British economy stayed above water. 2024 will probably go the same way of low but positive growth. Why is that?
Recessions, are ultimately a choice. A government can decide either to take the economic pain at a particular juncture, or defer it by running higher deficits. In the case of the UK, the latest deficit-to-GDP number was 5.5%, according to Bloomberg. Excluding the Global Financial Crisis and the pandemic, this is nearly double the average deficit of approximately 3%.
British economic growth for 2024 and 2025, is expected to be barely positive, much like in 2023.
We have settled down to four scenarios for the UK economy:
Soft Landing: This would include slightly positive growth, a strong labour market, inflation 2.5% to 3-5% by the end of the year and no more than 2-3 rate cuts in 2024 beginning in autumn.
Stagflation: near zero growth, persistent inflation and no more than 1-2 cuts late in 2024.
Recession: negative growth, inflation less than 2.5% and more than 3 rate cuts, beginning in the summer.
The Dream scenario: growth above 1.5%, falling inflation, 3 cuts or above beginning in the Summer.
At the time of writing, we assigned a 40% probability to a soft landing, an equal 25% probability to stagflation and the recession scenarios and 10% to the dream scenario.
Economic strength across the Atlantic and high fiscal spending are keeping Britain away from the clutches of a recession. Both trends are expected to persist in 2024, ahead of key elections for both countries. But when the UK looks to the east, it finds that its biggest trading partner, Europe, is experiencing a sharp slowdown, especially Germany.
When two-thirds of a country’s trade flows are weak, this weakness will likely be shared with its neighbours. The realities of Brexit further complicate things. Inflation is expected to continue dropping to around 2% by the end of 2024, without major disruptions to the labour market. While we are seeing a rebound in inflation, there is no evidence of a third inflation wave. As a result, the central bank should by now be pondering interest rate cuts later in the year, even if they are not ready to communicate those thoughts.
I would argue that risks there are plenty of upside risks, including the possible easing of geopolitical tensions and inflation coming down faster than anticipated, as consumers are more positive, but not buoyant.
Make no mistake, however. Risks abound. A flair-up of geopolitical tensions that would further stress trade could, potentially, lead to another significant jump in prices, leaving central banks with few options other than maintaining high interest rates. Should that scenario materialise, capital spending decisions slated for 2024 could be deferred, reducing economic growth.
An additional risk is financial stress. Last year we saw US peripheral banks unexpectedly failing (not that banks ever fail “expectedly”). A decade and a half of zero interest rates has probably prompted several business models to be created on the back of financial leverage. A jump in interest payments could unearth lingering issues with various companies that were masked with cheap money. In the UK, 47,000 businesses are reportedly already flirting with bankruptcy.
2024 is probably going to be a year of a “bumpy recovery”. And the “recovery” part depends on how high the “bumps” will be.
