- By Darshini David
- Chief Economic Correspondent BBC News
Rising prices, stagnant incomes and flat growth raise fears of a recession: 2023 was tough.
But with a surprise drop in inflation before Christmas, will the dawn of 2024 – potentially an all-important election year – ring a brighter, less stressful stage?
How does the UK experience compare to other places?
The worst of the cost of living crisis appears to be behind us – but prices in the UK were still 3.9% higher than in November a year ago.
Inflation in France is the same but higher than the EU's 3.1% inflation rate, looking at comparable figures. It's even less in the US.
Britain has had particularly stubborn inflation due to the two worst sources of price shocks affecting rich countries – rising energy and food costs fueled by the war in Ukraine in 2022 and post-pandemic labor shortages.
But as those pressures recede, the inflationary gap narrows.
Core inflation, which excludes food and energy, has been very persistent in the UK, suggesting consumers are more willing and able to spend. It could have been funded by wage increases or pandemic savings — but it's also being loosened.
Barring a fresh inflation shock, the Bank of England's rate hikes – 14 hikes in the past two years – may be over. But the pain persists.
This is true in many countries. Fed rates — and rates on new mortgage deals in general — have risen over the past two years.
However, the impact is different. In the United States and some of Europe, fixed-rate mortgage contracts typically run for 25 or 30 years and homeowners can switch contracts with little penalty. The French government also effectively controls rates, so a new 30-year mortgage contract costs 3.5%, while in the US those rates have risen to 7%.
Therefore, borrowers in those countries may be more protected from rate rises than in the UK, where the majority are on two- or five-year fixed-rate contracts. Millions have seen progress in repayment as contracts have been renewed, and hundreds of thousands more will follow in 2024.
But the blow for the latter may be softened. If the recent fall in UK inflation persists, some economists believe the Bank of England could cut rates in the spring at the same time as other central banks. Fixed-rate mortgage deals are already falling as financial markets grow more confident of cuts.
The previous two years had been slightly better than first thought – but in recent months, activity has stalled.
Official figures, revised in September, show that the UK economy is still no smaller than it was before the pandemic, contrary to earlier estimates.
Although the UK still lags behind the US on that score, it does slightly worse than France – and it does better than Germany. The latter has struggled, with production capacity vulnerable to weak demand from other countries and supply chain issues, particularly as it tries to mop up energy imports from Russia.
Economists are bearish on Germany's near-term prospects. But they are not very bright in England.
The latest official figures show the UK's economy stalled and slipped into reverse over the summer, raising the risk of a recession by the end of 2023. Many areas of the service sector serving families are smaller than they were before the pandemic.
The Bank of England expects no growth over the next two years as the impact of the recent rate hike continues to filter through income, profits and spending. The IMF is a little more optimistic.
UK growth over the past 15 years has generally been a fraction of the average before the 2008 financial crisis. Researchers at the Rising Inequality and Resolution Foundation say the typical British household is £8,000 more than rivals have echoed.
That is why politicians of all parties have put more growth on the priority list.
Despite Covid and higher rates, our job market has been resilient so far. The latest comparable unemployment rate in the UK shows 4.2%. This is in line with the G7 average. This is higher than Germany and the US but lower than France's rate of 7%.
But the widespread skills shortage by 2022 is gone. As those interest rates bite, employers are restricting hiring. Unemployment, too—less than one percent according to official estimates—but it could see more than a hundred thousand jobs.
But there is more. To count as unemployed, people must be available for work and looking for work – or they are considered inactive. The UK is one of the few wealthiest countries where people are more inactive than before the pandemic. Hundreds of thousands more. The number of chronically ill people has increased.
Helping more people back to work is seen by some policymakers as crucial to boosting growth and incomes. The autumn report contained a number of measures – from occupational health support to benefit restrictions that were both carrot and stick – towards it.
It doesn't affect jobs, inflation and rates fortunes.
Millions of workers will benefit from New Year's National Insurance cuts – but they will also see tax bills rise through their pay packets as the thresholds at which higher tax rates apply to income fail to rise with inflation.
So the UK's tax burden, the proportion of the country's income, GDP, tax paid per person, is yet to reach its post-war record.
But our tax burden was actually lower than the EU average, although in recent comparable numbers it is higher than in the US. The taxpayer in France already receives 46 cents for every euro in the economy there.
However, most countries will face greater pressures on their public finances due to aging populations and existing debts.
2023 has had its challenges, but by 2024, some areas will be happy – while others will mean some families continue to struggle.
There will be plenty to keep politicians busy drafting election manifesto promises and door-to-door debates.
The economy is one of the most important electoral battlegrounds, a sign of these challenging times.
Everyone wants to turbo-boost prosperity – the question for politicians and policymakers is how to do it.
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