What does the latest Bank of England forecasts mean for SME’s? 

In the latest of a series of articles, Phil Eckersley, former Agent for the Bank of England, considers the implications for SMEs from the latest Bank of England economic forecasts against the backdrop of the looming general election.  

May 9 2024 saw the latest publication of the Bank of England’s Monetary Policy Report.  The report provides an insight into the thinking of the MPC, the Bank’s rate-setting committee.  It also forecasts the MPC’s thinking on the future path of GDP growth and consumer price inflation in the UK. 

When is a recession not a recession?

Data released by the Office for National Statistics in the middle of February confirmed that the UK entered a technical recession in the second half of 2023 (defined by two consecutive quarters of contraction in GDP).  However, the reductions were modest (only 0.1% in Q3 for eg), and an upwards bias in previous revisions to historic data as more activity emerges, suggest that these contractions will be over-written, by positive growth in due course.  Any prolonged negativity surrounding talk of recession, however, has been short-lived, superseded by last week’s announcement that the economy grew by a robust 0.6% in Q1 2024.  Government, the FTSE (also boosted by strong $ earnings) and the media have made much of this, but seasoned economists know that quarterly data can be volatile and suspect that Q2 growth will be more modest.  Most pundits are now expecting UK GDP growth to be 1-2% in 2024.   

What about the Bank of England growth forecast?

In its latest growth forecast the Bank’s central case, the one it deems the most likely, has been revised up on the previous February publication.  The forecast is based on market assumptions for the future path of interest rates which have a downwards slant, which boosts growth.  Despite criticism in the press, the Bank’s growth forecasts have been pretty reasonable, covid notwithstanding, so I think it’s fair to say that the economy should expand over the forecast horizon and that firms should plan accordingly.  Consistent with the last article, I see business services remaining the strongest channel of growth.   

And what of government plans…?

Any pre-election boost in government spending seems notable in its absence.  This is in contrast to the rhetoric which is building up to the usual pre-election crescendo later in the year.  Talk of “securonomics” by the opposition, the idea being to select the best elements of free market thinking and marry them up to left-wing policies, does not appear to be accompanied by many firm policies that might allow firms to make hiring or investment decisions.  Thus, for many businesses, with both main parties appearing “policy-light”, there doesn’t appear to be sufficient policies to plan with. 

And what about inflation?

The Bank’s latest CPI forecast predicts a further cooling in inflation over the 2-3 year forecast horizon, consistent with easing global price pressures.  A number of these inflationary pressures, domestic and overseas, have dissipated over the course of the last 12 months with some, such as energy, no longer acting as a drag on headline CPI.  Food too, which represents a sizeable proportion of the inflation basket (11%), is no longer adding to inflation.  At the same time, household, business and financial market inflation expectations have been easing since peaking towards the end of 2022.  Some price pressures remain however, in particular wage inflation continues to run higher than the headline CPI rate. 

The likely path of interest rates in 2024

Recent weeks have seen further financial market speculation about the future path of the UK base rate.  Some of this stems from recent changes to voting patterns on the Monetary Policy Committee.  The latest vote saw a 7-2 split in favour of maintaining rates, one less than last time, with two members now looking to reduce rates.  This, along with stronger growth forecasts and easing inflation, has brought forward market expectations of the first reduction to June with around 50% probability.  Any reduction in the base rate will help ease household finances as well as reducing borrowing costs for businesses, a welcome respite after recent policy tightening.  Given the Policy committees’ obsession with controlling inflation, I think it may be another month or two before easing takes place, especially with wage growth only easing slowly.  The next data points for CPI will provide crucial evidence in determining the ultimate judgement.