Will 2024 herald much optimism?

In the first of a series of articles, Phil Eckersley, the former Agent of the Bank of England, considers some of the macro-economic factors likely to impact on SMEs in the coming year.

The New Year often brings cause for optimism, although it is hard to find much comfort from recent consensus forecasts.  Many pundits are predicting the UK economy will head into recession this year.  Despite the gloom among economic soothsayers, there are some factors that provide a more upbeat tone for SMEs struggling to cope with a challenging economic climate.

Likely employment trends

An easing labour market should help firms.  Recent data releases from the ONS have been signalling weaker earnings growth, lower vacancy levels and rising unemployment.  Labour market participation has also started to increase from its mid-2022 trough, improving the supply of workers looking for employment.   It is likely that these trends will continue in 2024.  Thus, firms should find it easier to recruit, retain and reward staff.  Wage demands should ease as inflation dissipates with workers enjoying modest real wage growth.  Skills shortages will persist, however, especially for specialists and in certain sectors.

What about interest rates?

In contrast to recent soundings from the Bank of England’s rate setting committee (The MPC), financial markets expect the Base Rate to start falling in 2024.  Recent inflation data for November, published mid-December, signalled a larger than expected easing in CPI leading markets to bring forward their expectations of the next rate cut to as early as March 2024.

A rate cut in March 2024?

This seems unlikely.  The disparity in views reflects a combination of the Bank’s view that core inflation, pay settlements and the services component of CPI are still running ahead of the headline figure. And part of the Bank’s mission is to manage inflationary expectations in order to alter firms’ and household behaviours. Thus, any hint that policy may be higher for longer should work as a deterrent to “inflation-busting” price setting.

But the good news is…

Despite the divergence of opinions, the recent fall in bond yields has already led to cheaper borrowing costs for firms and consumers, helping incentivise investment for the former and shore-up demand for the latter.  For firms, some of these benefits might, however, be offset by an increased credit risk and some political uncertainty as the country enters an election period.  Recent business surveys (Deloitte CFO and the latest Federation of Small Businesses Index) have both indicated tightening credit conditions, particularly for SMEs.

Growth prospects for 2024…

The outlook for growth appears mixed, but with the weight of evidence on the downside. Recent rises in interest rates combined with fiscal tightening are likely to restrain growth in 2024.  However, the picture is not universally negative.  Consumer-facing businesses will face challenges caused by the squeeze on real incomes of their customers, but the Autumn Statement provided modest respite for households in the form of lower National Insurance charges, while growth in real incomes should boost consumption.  These changes may be supported by the March 6^th Budget with the government coming under pressure to boost its popularity in the polls.

Those operating in the business-to-business sector should find activity a little more robust.  The weakness in firms’ capital spending has been a feature of the UK economy since the financial crises and particularly since 2016.  However, data for 2022 H2 and 2023 saw some recovery in investment.  This trend, coupled with the 2023 Autumn Statement making “full expensing” permanent, should encourage further recovery.  Indeed, after a prolonged period of weak capital investment, many firms will need to replace older inefficient equipment, machinery and plant in order to remain competitive.  The drive for digitisation/ e-commerce is frequently cited by firms as drivers of business investment in surveys.  Of course, some companies may opt to delay some of this spending in the light of political uncertainties with a General Election due later in the year.  Nonetheless, 2024 might be the year when business optimism returns, a theme I will explore in future Pathfinder articles.