This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
What is happening in the UK economy? Are things “getting better” in the summer of 2024, or worse? How might the landscape change, and what are the implications for your financial plan? Below, our financial planners explore some of these questions in more detail.
We hope these insights are helpful as you build your financial plan for 2024. Please contact us for more information or to discuss your financial plan with us.
What is the state of the UK economy?
The economy has a big impact on your finances. High inflation, for instance, erodes a household’s spending power – amounting to a real terms pay cut. Yet, to judge the state of the economy, we need to measure its progress in relation to key benchmarks.
Economists generally point to five main objectives for economies like the UK:
- GDP growth (gross domestic product). A good target for a country like the UK is 2.5%.
- Slow and steady inflation of 2% (i.e. price rises across the economy).
- Balanced trade (e.g. to avoid importing or exporting too much).
- Low unemployment and high employment.
- Sound public finances.
Looking at these measures, the UK economy in 2024 is arguably in a struggling state. GDP growth in the first quarter (Q1) was 0.6%. The headline inflation rate is now back at 2% (the Bank of England target), but underlying inflation measures – such as “core” inflation and services inflation – remain high.
Unemployment is low by historical standards but has risen to 4.4% in April 2024 (the highest since September 2021). The UK continues to run a current account deficit of 3.3% of GDP, and the national debt now stands at over 100% of GDP.
Could things “get better”?
As a new UK government takes power in Westminster, some are optimistic that the country could be turned around. Perhaps a new policy agenda could achieve higher GDP growth, helping to raise more revenues (e.g., worker incomes) that can be taxed to provide public services and public investment projects.
Of course, we all hope for better days. However, the UK economy has many deep structural issues that will be difficult to address. For instance, many successive governments have failed to balance the UK’s trade.
We continue to import far more than we export. This results in lower international competitiveness and economic growth because more money is leaving the country than entering it. In 2024, there is still no clear policy route out of this conundrum.
It seems reasonable to assume that inflation will gradually “cool down” over 2024-25 (barring another supply/demand-side “shock” like in 2022). As such, the case for lowering interest rates will likely strengthen.
What does this mean for households?
Two of the biggest macroeconomic variables that directly affect households are inflation and interest rates. If inflation is high, households lose their spending power because the same income buys fewer goods and services. If interest rates are high, then savers might benefit from higher regular savings rates. However, homeowners might face higher mortgage interest rates.
On these fronts, many people have understandably been frustrated with the slow rate of progress. The CPI inflation rate has come down repeatedly in 2024, but many workers (e.g., the low-skilled) have not seen their wages keep up with rising living costs.
Despite disinflation in 2024, the Bank of England (BoE) has held interest rates at 5.25% since August 2023. This has been welcomed by many savers who can access better interest rates on their cash. However, the gains are often overshadowed by rising rent/mortgage costs.
The government will also face some difficult decisions in 2024-25. According to the IFS (Institute for Fiscal Studies), anyone in power faces the reality of needing to raise taxes, lower public spending or both. Naturally, any of these outcomes would likely negatively impact household finances across the UK.
What can you do?
There is nothing anyone can do to control the wider economic landscape. All you can do is focus on the things you can change. From a financial perspective, this means preparing your budget and wealth for many possible outcomes while hoping for the best possible.
A good starting point is to check your emergency fund. Do you have 3-6 months’ worth of living costs readily available in easy-access savings? Having a “buffer” like this will help you manage potential financial setbacks (e.g. a costly home repair) without resorting to credit.
Are your income streams and investments tax-efficient and cost-efficient? Keeping needless expenses down will help you keep more hard-earned money in your pocket. For instance, are your returns protected using “wrappers” like ISAs and pensions?
A third step is to examine your protection plan. Is your household covered in the “worst-case” scenario, such as a premature death or serious illness/injury? Here, policies such as life insurance, income protection and critical illness cover can help safeguard your household.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
