UK economy and bonds: 2024 outlook

We forecast zero GDP growth in the UK in 2024, down from +0.4% in 2023. This forecast is below consensus and includes the chance of a small technical recession around summer. We expect the main drag on activity to come from the sharp tightening of financial and credit conditions in 2023, which should keep feeding through to the real economy, including housing, corporate margins and the labour market. Mitigating factors would include an improvement in real disposable income (nominal wage growth remains elevated) and the easing of inflation from very high levels.

Fiscal policy in the UK will be a wild card in 2024. Despite the uncertain impact, the government may use extra fiscal space to launch fresh stimulus measures ahead of the forthcoming general election, which must be held at end-January 2025 at the latest, but is more likely to take place in 2024. Should the UK enter a more severe slowdown, this fiscal room would quickly evaporate. Whoever wins the election will remain under pressure to tighten fiscal policy.

We expect UK inflation to slow from an average of 7.3% in 2023 to 2.6% in 2024. Headline inflation should ease faster than core, helped by lower energy, food and utility prices, while services inflation is likely to remain sticky. Ultimately, a weakening labour market should help wage growth and core inflation ease further in the second half of 2024.

The Bank of England will keep resisting rate cuts, focusing instead on the transmission of monetary policy. We forecast a first 25 bps rate cut in June and a total of 100 bps of easing in 2024, bringing the Bank rate down to 4.25% by year’s end.

Maintaining fiscal credibility is crucial for the UK government to prevent a recurrence of the mini-budget crisis of 2022 and to attract investors. We expect the 10-year gilt yield to end 2024 around 4%, slightly lower than its US counterpart due to lower economic growth. Structurally higher inflation leads us to maintain a neutral stance on UK government bonds.