ECONOMIC UPDATE SEPTEMBER 2024

The September 2024 Economic Update provides crucial insights into the economic landscape of the UK under the Labour government, as well as the global trends shaping the future. Labour has inherited a challenging economy characterized by low productivity and a public sector in disrepair, in stark contrast to its tenure between 1997 and 2010. Key policy measures implemented thus far include a £9.5 billion investment in public sector wage increases, funded by cutting capital projects and introducing means-tested benefits like the winter fuel allowance. These moves highlight Labour’s focus on balancing economic challenges with improving social welfare, though they have faced some backlash, especially from pensioners.

One of the significant challenges facing the UK economy is its limited capacity for growth. Contrary to popular belief, higher taxes do not necessarily hinder economic expansion. The real constraint on growth is the country’s capacity to increase supply in response to demand. As it stands, the UK’s potential for real GDP growth is capped at 1.8% annually due to chronic underinvestment. Addressing this underinvestment is critical if the country is to achieve higher growth rates in the future.

Labour has also set an ambitious goal of building 2.5 million homes on previously protected green belt land, now rebranded as the “grey belt.” This move aims to address the housing crisis in urban areas. However, a shortage of skilled tradesmen could slow progress, highlighting the structural issues within the labour market.

Globally, economic trends present additional complexities for the UK. China, a major player in the global economy, is experiencing a slowdown, with retail and investment spending growing at just 2-3%. Similarly, political risks in the USA, particularly with the upcoming elections, have created uncertainty. In contrast, within the EU, Germany’s struggling manufacturing sector is a concern, but Spain and the Netherlands offer more optimistic growth prospects.

Despite these challenges, the forecast for the UK by the end of 2024 is relatively positive. Real GDP is expected to grow by 1.5%, with inflation stabilizing at 2.9% and wage growth at 4.5%. The housing market will continue its upward trend, with prices projected to increase by 4%, supported by stable governance and increased investment.

By-
Roger Martin-Fagg
Behavioural Economist
England, United Kingdom