The main drag on growth is the delayed effect of past monetary policy tightening: according to the Bank of England (BoE), more than half of the impact of past monetary policy has yet to pass through to the real economy. This is a plausible timeframe because the larger share of fixed-rate mortgages relative to past episodes of monetary tightening implies a delayed and protracted impact of mortgage rates’ increases on household disposable income. High interest rates will continue to weigh on household consumption, investment and job creation. In turn, weak demand will likely gradually ease domestic inflationary pressures later this year. According to our scenario, inflation is expected to approach the 2% target in the second quarter of 2024, which should prompt the BoE to begin its rate cuts no later than August 2024. However, due to the tight domestic labour market and the uncertain geopolitical environment, inflationary risks remain tilted to the upside. 

High financing costs are weighing on consumer confidence. Households increased their savings rate (10.3% in the third quarter), despite an increase in real disposable income, probably in anticipation of higher debt service in the coming months. Households are likely to remain cautious in the short term against a backdrop of restrictive monetary (and fiscal) policy. Nevertheless, continued solid growth in real incomes should enable private consumption to resist and grow slightly in 2024. Admittedly, with falling inflation expectations and weakening demand for labour, wage growth in the private sector is likely to continue to wane in the coming months. However, upward pressure on wages will remain strong (the BoE forecasts private sector wage growth of around 5% to 6% this year) due to the structural factors that have led to a rise in the equilibrium rate of unemployment: Brexit, post-Covid problems such as long-term illnesses among inactive people, and the inadequacy of job seekers’ skills to fulfil the needs of the economy. In addition, the tax cuts announced in the Autumn Statement (mainly reductions in social security contributions paid by employees and the self-employed) as well as the 10% increase in the minimum wage planned for April 2024 will partially offset the increase in taxation generated by the freezing of tax thresholds. What's more, the government will likely announce additional tax cuts in its budget of 6 March 2024 against the backdrop of an election campaign. General elections are expected to be held in the second half of 2024 (probably in the autumn), as recently indicated by Prime Minister Rishi Sunak, although he did not rule out May as a possibility. The Labour Party remains well ahead in voter intentions, with a comfortable advance margin.   

Investment, residential in particular but also productive, will continue to weigh on growth. While tax incentives boosted business investment at the beginning of 2023, the Chancellor’s decision to make the full expensing permanent for qualifying plant and machinery investments is likely to result in a short-term decline in investment, as the incentive to anticipate investment has been removed. While inflation is also expected to continue falling over the coming months, real interest rates have started to rise. Finally, business investment will likely suffer from the uncertain global environment with heightened geopolitical risks, elections in the US, a slowdown in global growth and even a possible recession in the US.