In the first quarter of 2024, the UK economy showed mixed signals, with GDP growth rising by 0.6% after two consecutive quarters of decline, indicating a tentative recovery. Inflation eased significantly, with the Consumer Prices Index (CPI) falling to 2.3% in April from 3.2% in March, driven by lower food and energy prices. Earnings growth remained robust, with regular pay increasing by 6.0% annually, translating to a 2.0% real-term gain when adjusted for inflation. However, the unemployment rate rose to 4.3%, reflecting economic challenges and labor market adjustments. Despite these conditions, the Bank of England maintained the Bank Rate at 5.25%, emphasizing a cautious approach to balancing inflation control with economic stability.
GDP Growth
The first quarter of 2024 provided a mix of cautious optimism and ongoing challenges for the UK economy, as the nation navigates its path to recovery. According to the latest figures, UK GDP grew by 0.6% in Q1 2024, a welcome rebound following consecutive declines of 0.3% in Q4 2023 and 0.1% in Q3 2023. This quarterly growth, although modest, signals a turnaround from the technical recession that marked the end of 2023.
Sectoral analysis offers a deeper insight into the drivers of this GDP growth. The service sector, a critical component of the UK economy, showed robust performance with a 0.7% increase in output. This growth was widespread across various service subsectors, with notable contributions from transport and storage, which surged by 3.7%. Professional, scientific, and technical activities also recorded a 1.3% increase, driven mainly by legal activities and scientific research and development.
The production sector also demonstrated resilience, growing by 0.8% in Q1 2024. Manufacturing was a significant contributor, with output rising by 1.4%, led by a substantial 5.7% increase in the manufacture of transport equipment. However, this positive performance was tempered by a decline of 2.4% in water supply, sewerage, waste management, and remediation activities.
Conversely, the construction sector faced continued challenges, with output falling by 0.9% in Q1 2024, mirroring the decline seen in the previous quarter. This downturn was primarily driven by a 1.8% decrease in new work, particularly in private commercial projects, despite a slight increase in repair and maintenance activities.
The broader economic context remains critical in understanding these figures. Despite the quarterly growth, underlying structural issues and the restrictive stance of monetary policy continue to weigh on the economy. The Bank of England’s decision to maintain the Bank Rate at 5.25% reflects ongoing concerns about inflation and the need to control price stability while fostering sustainable economic growth.
Looking ahead, the UK government and the Bank of England face the dual challenge of stimulating economic activity and addressing sector-specific weaknesses. Targeted fiscal and monetary interventions will be crucial to support the service, production, and construction sectors and to ensure that the positive momentum seen in Q1 2024 translates into sustained economic recovery.
Inflation
In the first quarter of 2024, the UK saw mixed signals in its inflation dynamics, reflecting a complex economic landscape. The Consumer Prices Index (CPI) inflation rate decreased to 2.3% in April 2024 from 3.2% in March, indicating a significant easing of inflationary pressures. This decline in CPI suggests that the Bank of England’s monetary policies are beginning to have a substantial impact, bringing inflation closer to the target rate of 2%.
A detailed analysis reveals several key factors contributing to this trend. On a monthly basis, CPI rose by 0.3% in April 2024, compared to a 1.2% rise in April 2023. The most significant downward pressure came from falling gas and electricity prices, which have eased substantially following the reduction in the Office of Gas and Electricity Markets (Ofgem) energy price cap. This reduction has resulted in a historic drop in energy prices, with electricity and gas prices falling by 21.0% and 37.5% year-on-year, respectively.
Despite the overall decline in CPI, certain sectors continued to exert upward pressure on prices. Motor fuels were a notable exception, with prices rising this year compared to a decrease a year ago. Core CPI, which excludes volatile items such as energy, food, alcohol, and tobacco, also fell to 3.9% in April 2024 from 4.2% in March, suggesting a broad-based easing of inflation pressures.
The CPI for Q1 2024 overall showed a nuanced picture. While inflation moderated, it remained above the Bank of England’s target. The quarter began with a CPI inflation rate of 3.2% in March, down from 3.4% in February, driven by lower food prices and a general stabilization of consumer goods prices. The easing of inflation was supported by a decline in prices for food and non-alcoholic beverages, which rose by only 2.9% in the year to April 2024, the lowest rate since November 2021.
Overall, the moderation in CPI inflation in Q1 2024, and continued moderation in April, reflects a positive trend towards price stability, although challenges remain. As the economy navigates these dynamics, the interplay between inflation, wage growth, and monetary policy will continue to shape the economic outlook for the UK.
Earnings Growth
In the first quarter of 2024, the UK experienced notable developments in earnings growth, reflecting a labour market that continues to adapt to post-pandemic economic conditions. Regular earnings, excluding bonuses, saw an annual growth rate of 6.0% in January to March 2024. This robust growth in nominal wages highlights the ongoing strength of the labour market, even amid broader economic uncertainties.
When adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH), real annual growth for regular pay stood at 2.0% in Q1 2024. This positive real wage growth indicates that employees’ purchasing power is increasing, a critical factor in sustaining consumer confidence and economic stability. The ability of wage growth to outpace inflation suggests that workers are seeing tangible benefits in their earnings, which can support higher consumer spending and contribute to overall economic growth.
A closer look at sector-specific earnings reveals varying dynamics across different parts of the economy. The public sector experienced a regular earnings growth rate of 5.8%, slightly lower than the private sector’s 6.2%.
Within the private sector, certain industries stood out for their substantial wage increases. The wholesaling, retailing, hotels, and restaurants sector led with a remarkable 7.2% growth rate. This sector, heavily reliant on consumer spending, likely saw wage increases driven by competitive labour market conditions and efforts to attract and retain workers. Manufacturing and finance and business services also showed strong wage growth, at 6.9% and 6.7%.
The dynamics of wage growth in Q1 2024 also highlight ongoing adjustments in the labour market. The resilience and flexibility of the labour market are evident in the ability of various sectors to adapt to new economic realities and maintain competitive wage levels.
The sustainability of these wage increases, against the backdrop of broader economic conditions and productivity levels, will be a key consideration for both policymakers and businesses. As we move forward, understanding the factors driving wage growth and their implications for the wider economy will be essential for fostering a balanced and resilient economic recovery.
Unemployment Rate
The UK labour market presented a mixed picture in the first quarter of 2024, with both positive developments and ongoing challenges reflected in the latest unemployment figures. The UK unemployment rate for people aged 16 years and over rose to 4.3% in January to March 2024, an increase from the previous quarter and above the estimates from a year ago. This uptick in the unemployment rate indicates that, while the labour market remains relatively resilient, it is experiencing some strain as the economy adjusts to the impacts of tighter monetary policy.
Despite this increase, the unemployment rate remains low by historical standards, reflecting a labour market that continues to exhibit underlying strength. The rise in unemployment can be partially attributed to the broader economic slowdown and the technical recession that the UK experienced at the end of 2023. As GDP growth contracted in the latter half of the previous year, its effects are now being felt in the labour market, contributing to the higher unemployment rate.
Additionally, the UK’s economic inactivity rate for people aged 16 to 64 years increased to 22.1% in January to March 2024, up from the previous quarter and higher than a year ago. This rise in economic inactivity, which includes people who are not actively seeking work, further complicates the labour market dynamics and underscores the challenges of bringing more people into the workforce.
The number of payrolled employees saw fluctuations during this period, with a decrease of 5,000 between February and March 2024. However, on an annual basis, the number of payrolled employees increased by 288,000 (1.0%), indicating that despite recent monthly declines, the overall demand for labour has been relatively robust over the past year.
Moreover, the early estimate for April 2024 shows a decrease of 85,000 (0.3%) payrolled employees on the month, but an increase of 129,000 (0.4%) compared to April 2023.
Vacancies in the UK also decreased by 26,000 in the quarter to 898,000, marking the 22nd consecutive period of decline. Despite this decrease, vacancies remain above pre-pandemic levels, highlighting the continued demand for labour across various sectors. The persistent decline in vacancies, however, indicates a cooling labour market, which aligns with the observed rise in unemployment.
Interest Rate
The Bank of England’s Monetary Policy Committee (MPC) made the strategic decision to maintain the Bank Rate at 5.25%. The latest decision, reached at the committee meeting ending on May 8, 2024, reflects a cautious approach amidst a complex economic landscape characterized by persistent inflationary pressures and subdued economic growth.
The MPC’s choice to keep the Bank Rate unchanged underscores its commitment to achieving the 2% inflation target while also supporting sustainable economic growth and employment. The decision was not unanimous; two members preferred to reduce the Bank Rate by 0.25 percentage points to 5.0%.
The Bank of England’s latest projections, detailed in the May Monetary Policy Report, indicate that UK GDP is expected to have risen by 0.2% in Q2 2024. Despite this modest growth, demand is projected to remain weaker than potential supply throughout most of the forecast period. This scenario suggests that an element of economic slack will persist.
Internationally, the economic context has also played a significant role in shaping the MPC’s decision. Recent growth outcomes have been stronger in the United States compared to the euro area, with underlying inflationary pressures moderating somewhat in both regions, though less than expected in the US. These global dynamics, including rising forward interest rates in the US, have influenced the Bank of England’s policy considerations.
The MPC’s decision to hold the Bank Rate steady at 5.25% also takes into account the anticipated future path of interest rates. The committee’s projections are based on a market-implied path for the Bank Rate that declines to 3.75% by the end of the forecast period (three years from now). This anticipated reduction reflects expectations of easing inflationary pressures and a strategic response to the subdued GDP growth outlook.