Can the UK Economy Match the Performance of the Rest of Europe in 2024?

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UK (Parliament Politics Maganize) – The UK economy has displayed unexpected resilience this year, aligning its prospects with those of other developed markets in key aspects, as outlined by Goldman Sachs Research.

Anticipated for 2024, Goldman Sachs Research’s Chief European Economist Jari Stehn notes a modest improvement in GDP growth for the UK in their report titled “UK Outlook 2024: 

Not So Different After All.” Contrary to consensus forecasts from economists surveyed by Bloomberg, Goldman Sachs economists project that several major world economies, including the UK, will outperform these expectations.

Resilient UK Economy Poses Surprising Growth in 2024, Defying Consensus

Significant positive developments are on the horizon for the UK economy. Goldman Sachs Research predicts a notable boost of approximately 2.5% in real disposable income in 2024, attributed to a decline in headline inflation and sustained wage growth.

 The adverse impact of the Bank of England’s rate hikes, previously a growth drag, is now reaching its peak and is expected to diminish steadily throughout 2024.

While fiscal policy is poised to exert a dampening effect on growth as the government unwinds Covid and energy support measures, Goldman Sachs economists estimate a slight reduction in the fiscal drag on GDP growth in the coming year.

Stehn notes in our analysis of the primary growth drivers that there is a projected modest uptick in growth for the upcoming year. According to Goldman Sachs Research, GDP growth (non-annualized) is expected to be 0.1% in the first quarter, 0.2% in the second and third quarters, and 0.3% in the final three months of 2024. 

Our economists anticipate a 0.6% expansion for the UK economy next year, a significant improvement compared to the BoE’s forecast of 0.1% and slightly surpassing the consensus estimate of 0.4%.

Goldman Sachs Predicts Modest GDP Growth and Labor Market Rebalancing in the UK for 2024

Despite the sustained growth, the labor market has undergone significant rebalancing this year, according to Goldman Sachs Research. The economists note a substantial reduction in the jobs-workers gap, indicating a decreased disparity between the total number of jobs and available workers. 

While the initial rebalancing was primarily driven by a decline in job vacancies, a recent uptick in the unemployment rate to 4.2% (compared to its low of 3.5%) has also contributed to this rebalancing. 

When assessed using the jobs-workers gap, the UK has now reversed a greater portion of the post-Covid labor market overheating compared to both the US and the euro area.

Wage growth is exhibiting initial signs of deceleration. Despite the ongoing high annual run-rate, Stehn notes a gradual alleviation of pay pressures. 

These pressures are anticipated to diminish further, influenced by decreasing headline inflation and the continuous rebalancing of the labor market. Sequential wage growth is projected to drop to approximately 4.5% (non-annualized) by the conclusion of 2024.

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Wage Growth Slows as Inflation and Labor Market Dynamics Evolve in the UK

Underlying inflation metrics have experienced a considerable cooldown. While the decline in core goods inflation has played a significant role, pressures in services have also abated, according to Goldman Sachs Research. 

Economists predict that this disinflationary trend will persist, albeit at a more moderate pace, with year-over-year headline and core inflation forecasted at 2.6% and 2.8%, respectively, by the end of 2024.

In alignment with the Federal Reserve and the European Central Bank, the BoE is likely to maintain steady interest rates rather than pursuing further hikes. However, Stehn suggests that rate cuts are not anticipated until the third quarter of 2024, aligning with the ECB and preceding the Fed by one quarter.

The UK economy is projected to trail behind the EU and the US in 2024, according to Goldman Sachs Research. In comparison to the economies of the US and the euro area, the UK is expected to face several challenges throughout 2024. Real disposable income is anticipated to show less improvement, reflecting more persistent inflation in the UK. 

Additionally, the sensitivity of mortgages to monetary policy in the UK is higher, leading to a forecast of more enduring demand challenges in 2024 compared to the US or euro area, as noted by Stehn.

The UK is grappling with a significant rise in long-term sickness following the pandemic, impacting its labor force participation. This exacerbates the shortage of workers, already experienced in certain sectors post-Brexit. Goldman Sachs Research estimates the UK’s structural unemployment rate to be around 5%, surpassing the BoE’s latest estimate of 4.5%.

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.