As 2024 draws to a close, it gives us a chance to look back on how our economy has developed over the past year and appreciate the challenges that our country has faced. From still feeling the effects of the COVID-19 pandemic to the general election, it’s safe to say there is a lot to cover.
Inflation and Interest Rates
In January 2024 we entered the new year with inflation at 4.2% (measured by the CPI), although this was a major improvement from the October 2022 cost of living crisis where inflation was at 11.1%, the Bank of England still had not reached their 2% target. Several factors continued to drive inflation, many of which are the residual effects of prior global events, notably the Russia-Ukraine conflict. This war has disrupted energy supplies, leading to increased energy prices. Given the UK’s significant reliance on imported energy, these escalated costs have permeated the broader economy, resulting in higher consumer prices. Additionally, supply chain disruptions stemming from the COVID-19 pandemic have persisted, causing delays and shortages in production. These ongoing issues have further elevated prices for goods and services within the UK. Finally, the United Kingdom’s departure from the European Union (Brexit) has introduced additional financial burdens for businesses involved in cross-border trade, particularly in relation to the importation of goods. These logistical challenges and associated costs continue to exert upward pressure on inflation in the UK economy.
In May 2024, the BoE successfully reached its inflation target of 2% for the first time since early 2021. This reduction in inflation can be attributed to several key factors: a stabilization of energy prices due to a reduction of war-related impacts, improved agricultural production that contributed to lower food prices, and the BoE’s hawkish monetary policy stance. Throughout 2022 and 2023, the BoE implemented multiple interest rate hikes. By 2024, the effects of these elevated rates began to produce the desired outcome. The tightening of monetary policy effectively curtailed demand in the economy, particularly in sectors such as housing and consumer spending, thereby easing inflationary pressures.
The UK entered August 2024 with an inflation rate of 2.2% and on the 1st of August 2024, the BoE cut interest rates from 5.25% to 5%. This was the first cut since the start of the pandemic in March 2020. Additionally, November 7th, 2024, interest rates were cut further from 5% to 4.75%. As inflation had reached its target it made sense for the BoE to implement a more expansionary MP in order to grow the economy through investment and consumer spending.
The BoE aims to keep inflation around the 2% mark as we enter 2025 and as for interest rates OECD said that UK interest rates, which currently stand at 4.75%, are expected to fall back to 3.5% by early 2026.
Economic Growth
In 2024, the UK’s real GDP exhibited moderate growth (although shrinking in recent months), indicating a recovery from the economic challenges encountered in preceding years, which included the COVID-19 pandemic, elevated inflation rates, and the repercussions of Brexit. This growth trajectory was primarily driven by the services sector, which benefited from increased consumer expenditure, particularly within hospitality, finance, and technology. Moreover, strong demand in professional services and the broader business sector further contributed to overall economic performance.
Nevertheless, several factors dampened this growth. High interest rates, sustained by the BoE to mitigate inflation, constrained consumer spending and business investment, particularly in the housing sector and substantial capital expenditures. Additionally, a tight labour market exerted upward pressure on wages, thereby limiting the capacity of businesses to invest in expansion initiatives.
Global economic conditions also played a pivotal role in supporting the UK’s growth, with enhanced trade relations and gradual recovery in the manufacturing and construction sectors, which had previously experienced significant disruptions.
In summary, the real GDP growth in 2024 was characterized as positive but modest, reflecting a balance between recovering demand, stringent monetary policy, and external challenges. The performance of the economy demonstrated resilience despite ongoing constraints.
Fiscal Policy
One of the key trends in 2024 was the continued freeze on income tax thresholds. The personal allowance remained at £12,570, and the higher rate of income tax (40%) continued to apply to income above £50,270. Similarly, the additional rate of income tax (45%) continued to apply to income above £150,000. These freezes, which were initially implemented in previous years, meant that as inflation and wages rose, more individuals were pulled into higher tax bands, effectively increasing the tax burden on many middle and higher earners- a fiscal drag.
In April 2024, the UK raised its corporation tax rate from 19% to 25% for companies with profits above £250,000. This marked a major shift in the tax system as the UK moved towards a higher tax rate after maintaining the 19% rate for several years, primarily aiming to fund public spending needs. However, to offset the impact of the rate increase on smaller companies, the government introduced a small profits rate of 19% for businesses with profits below £50,000. This allowed smaller firms to continue benefiting from the lower rate, shielding them from the full impact of the rate hike. The UK government continued to offer incentives for businesses to invest in innovation and growth. For example, the Research and Development (R&D) tax credits remained available to incentivize investment in new technologies and scientific advancements, innovation is the key to increasing the UK’s long run macroeconomic health as it will benefit so many areas.
The election of the Labour party in July 2024 marks a pivotal moment for the UK’s fiscal future. Their vision for the coming years includes transformative measures to generate revenue: closing non-domicile tax loopholes, implementing VAT on private schools, eliminating the carried interest tax loophole, and increasing stamp duty on residential property purchases by non-UK residents. This funding will be vital in driving forward initiatives like enhanced teacher training, expanding operations, acquiring more CT and MRI scanners, and establishing free breakfast clubs in every primary school, hopefully contributing to an increase in the UK’s productive capacity.
It’s Promising…
As we can see, the UK is finally seeing improvement following on from the challenging few years we’ve had. Hopefully this upwards trajectory can be maintained, and policies implemented will continue to benefit our economy.
In my opinion, moving into 2025 I’d love to see a focus on improving the economies productive potential, movement towards greener living and improvements in the export-market to drive export-led growth.
