UK Living Standards to Improve in Time for Election, NIESR Says

Philip Aldrick
·2 min read

(Bloomberg) -- UK living standards will improve this year but the government needs to boost public investment significantly if it is to break out of a cycle of low growth, according to a leading think tank.

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Inflation will fall to 1.2% in the second quarter and the Bank of England will start cutting interest rates in May, the National Institute of Economic and Social Research said in its quarterly outlook.

The forecasts will be welcomed by Prime Minister Rishi Sunak, who is counting on people feeling better off to revive the fortunes of his Conservative Party ahead of a general election expected later this year. The Tories are trailing the Labour opposition by around 20 percentage points in opinion polls.

Household living standards will rise by 1.5% on average over the next two years as wages grow faster than prices, closing some of the ground lost during the pandemic and inflation shock, NIESR said.

However, the benefits will not be evenly spread, with real incomes for the poorest tenth of households still £4,500 ($5,670) below where they were in 2019-20. It will not be until 2027 that living standards finally return to pre-Covid levels.

Moreover, overall growth is set to remain anemic. After experiencing a technical recession in the second half of 2023, the economy will grow just 0.9% this year and at a similar rate in the medium term, according to the institute, which uses the same model as the UK Treasury.

NIESR said the solution was increased investment rather the “pre-election tax giveaways” that Chancellor Jeremy Hunt is expected to announce in his March 6 budget. At a minimum, public investment needs to be maintained at 4% of GDP for the next decade.

Good and Bad News

“The good news for 2024 is that inflation finally looks like it’s coming back to the Bank of England’s 2% target,” said Stephen Millard, NIESR’s deputy director for macroeconomic modeling and forecasting. “The bad news is that trend growth remains low, at around 1%. There is a desperate need for increased public and private investment if higher growth is to be restored.”

In a separate report, job-search site Indeed said job postings are now around 5% below pre-pandemic levels after virtually no growth in January. In London, they are almost 20% below, with hybrid working and a slowdown in many professional services weighing on hiring demand.

The findings suggest employers turned cautious heading into 2024, though Indeed warned that the labor market may not have eased enough for BOE policymakers worried about the strong pace of wage growth. Skllls shortages remained acute in areas such as child care.

“With unemployment still low and continuing challenges around workforce participation, it remains a somewhat tight labor market,” said Jack Kennedy, senior economist at Indeed UK.

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