Britain began 2024 with promising signs as inflation steadily declined before rebounding in November, but as 2024 draws to a close, fears of stagflation- a phenomenon combining stagnating growth and rising inflation, have begun to dominate economic discussions.
The Consumer Prices Index (CPI), which started the year at 4%, dropped to the Bank of England’s 2% target by May, a level last seen three years ago.
Former Prime Minister Rishi Sunak praised the achievement, attributing it to his government’s “bold action” during the cost-of-living crisis.
However, the success was short-lived as inflation briefly fell to 1.7% in September but rebounded to 2.6% by November, driven by persistent pressures in the services sector and rising wages.
Labour sweeps to power amid economic optimism
Despite the early economic recovery, political change defined 2024.
In July, the Labour Party won a landslide victory in the general election, ending over a decade of Conservative rule.
Sir Keir Starmer became Prime Minister, with a vision to restore growth and make the UK the fastest-growing economy in the G7.
Labour’s ambitions faced immediate tests.
In the October 30 Budget, the government raised employers’ national insurance contributions and announced a significant increase in the minimum wage for 2025.
While these measures aimed to boost household incomes, they sparked concerns about rising business costs and inflationary pressures.
Interest rates: relief tempered by caution
The Bank of England provided some relief to borrowers in 2024, cutting interest rates for the first time since March 2020.
The base rate, which had been at a 16-year high of 5.25%, was reduced to 5% in August and further to 4.75% in November.
Despite these cuts, the Bank struck a cautious tone, emphasizing persistent inflation risks.
Regular wage growth, which peaked at 7.9% in 2023, remained higher than forecast, exacerbating underlying inflation.
Rate-setters warned that the path to further reductions would be “gradual” and dependent on inflationary trends.
Economic growth stumbles after a promising start
The UK economy showed resilience in early 2024, emerging from a shallow recession with 0.7% growth in the first quarter.
This recovery offered hope that Britain was turning a corner. However, by summer, growth had stalled.
Zero GDP expansion was recorded in the third quarter, and the Bank of England predicted no growth in the year’s final months.
This stagnation pushed the economy dangerously close to another technical recession, defined as two consecutive quarters of negative output.
Labour’s promise to restore growth was further complicated by the slowing economy, which became a central challenge for its new administration.
The job market shows signs of strain
While wage growth offered a cushion for households, the labor market painted a less optimistic picture.
Unemployment rose to 4.3% by autumn, and job vacancies plummeted.
The number of workers on payrolls remained largely static throughout the year, signaling a cooling jobs market.
Businesses warned that Labour’s budget measures, particularly the rise in employers’ national insurance contributions, could lead to hiring slowdowns and layoffs in 2025.
Many firms indicated they would need to raise prices to offset increased costs, potentially driving inflation higher.
Stagflation fears: what are analysts saying?
As 2024 drew to a close, fears of stagflation—a combination of stagnating growth and rising inflation—began to dominate economic discussions.
Analysts predicted inflation could rise above 3% by spring 2025, fueled by Labour’s budget measures and persistent cost pressures.
Despite this, there were glimmers of hope. The worsening GDP outlook might accelerate interest rate cuts in 2025, providing relief for borrowers.
Economists forecast three to four reductions next year, although global uncertainties, including trade policies under incoming US President Donald Trump, could add to the unpredictability.
Laith Khalaf, head of investment analysis at AJ Bell said,
With the economy stalling, the watchword for 2025 is now stagflation. Wherever you look, the green shoots of an inflation revival seem to be pushing up the turf.
Khalaf sad that as inflationary pressures build, the Bank of England is likely to remain cautious about making aggressive interest rate cuts.
However, economists suggest there may still be hope for borrowers in 2025, as a weakening GDP outlook could prompt faster reductions in borrowing costs.
Philip Shaw at Investec Economics said, “The better news is that it will make the Monetary Policy Committee more inclined to bring interest rates down early next year.”
While most experts expect three to four rate cuts in 2025, the economic outlook remains uncertain due to the unclear impact of the Budget measures and the potential implications of incoming US President Donald Trump’s trade tariff plans.
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