Economists are pointing to a potential emergence of Britain's economy from recession, propelled by a significant surge in real wages. This wage surge is considered a pivotal factor in bolstering the economy, potentially indicating a favourable shift in its overall trajectory.
Wage Surge Signals Potential Relief from UK Cost of Living Crisis
As Britain approaches the election, there's growing optimism fuelled by a resurgence in household spendings power, driven by pay increases outpacing inflation. Samuel Tombs, an economist at Pantheon Macroeconomics, anticipates a significant 2.6% rise in real wages this year, potentially serving as the catalyst to pull the UK out of recession.
With expectations of continued brisk wage growth, including a near -10% increase in the National Living Wage and businesses planning wage hikes of 5.1% over the next year, the prospect of the strongest real wage growth in 17 years looms large, notwithstanding disruptions from the furlough scheme.
Anticipated Wage Increase Offers Hope for UK Economic Recovery in 2024
According to Mr. Tombs, the anticipated rise in wages is expected to boost consumer spending and stimulate economic growth following a 0.3% contraction in GDP during the last quarter of 2023, which pushed the country into recession.
However, there's a silver lining on the horizon as Mr. Tombs projects a turnaround, foreseeing a 0.3% expansion in the economy during the first quarter of 2024. This optimistic outlook suggests that the downturn might soon come to an end, signalling a potential resurgence in economic activity.
He said: “Mortgage rates are down from their peaks, unemployment remains very low and house prices – often an indicator of consumer sentiment – are rising again.
“Many households also have recently replenished the rainy day funds they depleted in 2022.”
Ian Stewart, chief economist at Deloitte, highlighted the irony of last week's recession occurring amidst a brightening economic outlook. He noted that inflation is declining, real earnings are increasing, and mortgage rates have dropped.
Newly revised data revealed a surprising decrease in unemployment throughout the second half of last year, coinciding with the onset of recession. Stewart pointed out that consumer and business confidence have been on the rise in recent months, indicating a sentiment that the worst may be over.
He anticipates growth to resume during the summer months, leading to economic expansion in the latter half of the year, characterizing the current recession as relatively mild.
Mr. Stewart also suggested that with further data on the economy's performance, statisticians may revise the figures, potentially revealing that there was no recession after all, similar to what occurred with the "double-dip" recession following the financial crisis.
However, he cautioned that there's a risk of interest rates remaining at 5.25%, potentially for a longer duration than anticipated, which could adversely affect the economy.
Former Bank of England Economist Urges Swift Interest Rate Cuts
Andy Haldane, the Bank's former chief economist, cautioned that Britain's recession could deepen unless the Monetary Policy Committee takes prompt action to lower interest rates.
He criticized the Bank for being sluggish in raising borrowing costs during inflationary periods, and now faces the risk of being similarly slow in reducing them as inflation moderates and the economy faces a downturn.
In an interview with Bloomberg, Haldane expressed concern over the potential damage to the Bank's credibility, emphasizing the importance of avoiding a "double blow" to confidence by mishandling both inflation and economic downturns.