Alexis Bienvenu

Sunny intervals over the UK

Many a time, the UK has shown itself resilient after flirting with collapse. Will this again be the case in 2024?

If we trust the last two business surveys, there can be no doubt – in March, the three major economic sentiment indicators, for services, manufacturing and construction, are all above 50 for the first time since June 2022. This is the threshold between economic expansion and contraction. Certainly, it’s a narrow margin – whilst the services PMI[1] is at a comfortable level of 53.1, for manufacturing and construction this falls to 50.3 and 50.2, respectively. Nonetheless, the convergence of the signal for all three sectors is striking, particularly in comparison to the eurozone, where the same indicators are clearly lower, at 51.5, 46.1 and 42.4, respectively, dragged down in particular by Germany at 50.1, 41.9 and as low as 38.3 for the construction sector!

The slight recession suffered in the last two quarters of 2023 thus seems to be over, whereas Germany is stuck in a rut and France regularly downgrades its forecasts. And yet, obstacles abound. In particular, since 2022, the country has experienced strikes of an amplitude not seen in over a decade. As of the beginning of April, there is still no reconciliation in sight. Train drivers are starting a new round of strikes. Wage demands are being fuelled by the rampant inflation of the last two years. This is also the case elsewhere of course, but it is true that inflation in the UK remains higher than in its main partners. In February, it was still 3.4%, whereas it had fallen to 2.6% in the eurozone[2].

However, inflation may soon disappear as one of the UK’s worries. The Bank of England forecasts that it will fall to under 2% by the second quarter of 2024. The path to a fall in interest rates around summertime thus seems clear, as in the eurozone. There is just one difference, conflicting national approaches play no role within the Bank of England, which may provide additional visibility. The stakes are even higher than in the eurozone, as the refinancing rate is 5.25%, versus 4.50% in the eurozone. This makes action all the more important.

Whilst growth, inflation and even real estate are thus clearly converging towards improvement, nonetheless, impediments to recovery remain. The political situation, in particular, could be chaotic. The Conservative Party has been in power for 14 years, but this apparent stability belies a huge degree of volatility, as illustrated by the bizarre comings and goings of the Boris Johnson government. Opinion polls give the Conservatives little chance of winning the upcoming general election due to be held by January 2025, most likely in October of this year. The Sunak government has failed to win over His Majesty’s subjects. There could therefore be a shift to the left by the end of the year, bringing new surprises on the economic front.

Yet by then momentum in the United Kingdom should be putting several major European Republics in the shade. So is that the last of the Brexit impact? Certainly not, especially as new customs controls on imports from Europe – already postponed five times – should start to apply from 30 April this year, which would be tantamount to higher taxation. More generally, a January 2023 study by Bloomberg – of course a reputedly anti-Brexit outfit – put the cost of Brexit at over EUR 100 billion per annum. Testament to the UK’s resilience: despite this millstone – which surveys indicate that the majority of Britons now regret – its medium-term outlook is more dynamic than that of the eurozone’s German flagship. Long live the Kingdom!

Final version of 5 April 2024 – Alexis Bienvenu, Fund Manager, La Financière de l’Echiquier (LFDE)

[1] S&P Global UK PMI, seasonally adjusted
[2] Eurostat