By William Schomberg and Sumanta Sen
LONDON (Reuters) – British Prime Minister Rishi Sunak is facing a bleak economic backdrop to the election he is expected to call next year, adding to the challenge he faces trying to undo the opposition Labour Party’s strong lead in opinion polls.
The economy looks set for at best minimal growth in 2024, or possibly none at all. But inflation pressures will probably remain strong, meaning the Bank of England (BoE) is likely to keep interest rates at their 15 year-high for much of the year.
Sunak must hold an election by Jan. 28, 2025 but he is expected to call it in October or November 2024. He might go for May if his Conservatives can narrow a 20 percentage-point lag in the opinion polls behind Labour, which also scores better in polls on which party would be best to run the economy.
Below is a summary of the economic outlook, which may influence Sunak’s decision on when to call the election.
NO BIG BOUNCE SEEN FOR ECONOMY
Forecasts for the economy in 2024 vary from stagnation to lacklustre growth.
The BoE has said it expects zero growth next year while the government’s forecasters at the Office for Budget Responsibility (OBR) and the Organisation for Economic Co-operation and Development have both forecast growth of 0.7%.
That would be far below Britain’s average annual growth rate of nearly 3% in the decade before the 2007-08 financial crisis.
Finance minister Jeremy Hunt has said previous forecasts of a recession in Britain proved wrong and his plans for the economy are working.
GROWTH TO GAIN SOME MOMENTUM
One possibly encouraging sign for Sunak are expectations that economic growth will pick up a bit of pace as 2024 goes on.
A Reuters poll of analysts published on Nov. 9 showed the economy flat-lining in the first three months of the year, followed by quarter-on-quarter growth of 0.2% in April-June period and 0.3% in the third and fourth quarters.
But that would still be far slower than average quarterly growth of about 0.5% growth in the five years before the coronavirus pandemic.
The poll was conducted before Hunt announced a cut to social security contributions for individuals from January. Analysts say the growth boost will offset only a small part of the hit to households from higher inflation, taxes and borrowing costs.
INFLATION TO EBB
There are other economic reasons why Sunak might want to wait until later in 2024 before holding the election, including the likelihood that inflation will drift down.
After an expected spike in January 2024 – caused by bigger-than-usual sales discounts in the same month in 2023 – the OBR forecast inflation will stand at about 2.8% by the end of the year, down from 4.6% in October this year.
Inflation has dropped from over 11% in October 2022. But the BoE has forecast it will not return to its 2% target until late 2025, prolonging households’ loss of spending power.
UNEMPLOYMENT TO RISE
Unemployment is expected to rise as 2024 goes on as companies and consumers will increasingly feel the weight of the BoE’s steep run of interest rate hikes between December 2021 and August this year.
The BoE says the unemployment rate will rise over the next three years and will be 4.7% by the end of 2024, low by historical standards but up from its projection of 4.1% at the end of this year.
Stephen Millard, deputy director of the National Institute of Economic and Social Research, said the rise was more likely to reflect people staying unemployed for longer than an increase in the number of people losing their jobs.
FEELING THE PINCH
As well as the cut in social security contributions, the government has approved an almost 10% increase in the minimum wage which will boost lower-paid workers’ earnings from April.
Despite that, real household disposable incomes remain on course for the only fall from one election to the next since World War Two, according to the Resolution Foundation think tank. The last general election was in December 2019.
The government says much of that pain is due to its attempts to repay the huge costs of supporting the economy and households during the pandemic and the energy price surge in 2022.
MORTGAGE PAIN AHEAD
The BoE’s higher interest rates will be felt by more homeowners throughout 2024 as their fixed-rate mortgages expire and are reset at higher rates.
Around 1.5 million fixed mortgages are due to expire next year, according to UK Finance, a group representing lenders, up slightly from 1.4 million in 2023.
Financial Conduct Authority data shows the number of mortgages due for renewal will edge down as 2024 goes on.
Sunak and his finance minister Jeremy Hunt have one more chance to persuade voters that the Conservatives represent the best bet for their incomes: the spring budget that is expected in late February or March.
Many Conservative lawmakers are hoping for further tax cuts but Hunt’s room for manoeuvre is limited by his own fiscal rule to bring down debt.
The Resolution Foundation estimates that the 13 billion pounds ($16.5 billion) of Hunt’s room for tax cuts or extra spending after November’s tax cuts is less than half the average most of his predecessors have had to play with since 2010.
($1 = 0.7899 pounds)
(Additional reporting by Andy Bruce and Alistair Smout; Writing by William Schomberg; Graphic by Sumanta Sen; Editing by Frances Kerry)