UK households should start feeling better off as election looms

Think tank: National Institute of Economic and Social Research (NIESR)

Author(s): Various authors

February 7, 2024

This report from UK think tank NIESR looks at the UK economic outlook.

A combination of lower inflation and sustained wage growth should mean that UK households start to feel better off in the course of 2024.

Living standards are projected to rise by around 1.5 per cent on average over the next two years. But the overall figure masks marked differences in the household income and regional distributions. For households in the bottom half of the income distributions, living standards will be between seven and 20 per cent lower in 2024-25 (relative to 2019-20), and will not return to pre-pandemic levels until 2027. Additionally, for the poorest 10 per cent, the fall in real income since 2019-20 amounts to approximately £4,500 (in current prices).

At a regional level, year on year growth of weekly gross pay reveals an uneven pattern of Levelling Up. Whilst low-income earners in some regions, like the North-East, are catching up, low-income earners in other parts of the country, such as Wales, the East of England, the East Midlands and the South-West, are seeing their pay go up much more slowly.

We anticipate inflation will remain volatile throughout 2024, although it is coming down faster than previously expected. As such, we expect it to fall below the Bank of England target during the second quarter of the year, before rising slightly above target by the end of the year. We also expect the Bank of England to start cutting interest rates in May and that eventually rates will settle at around 3.25 per cent in the medium term.

Whoever wins the election will inherit an economy that is bereft of significant growth. Whilst this year should be an improvement on 2023 – a year where the overall growth rate was 0.3 per cent and may have included a technical recession in the second half – we still only expect GDP to grow by 0.9 per cent in 2024 and at a similar rate throughout the medium term.