David Smith, Economics Editor of the Sunday Times, addressed an audience at London’s Bloomsbury Hotel on 21st March 2024 to share his predictions and insights into the current economic landscape, following the recent Spring budget.

David began by noting that 21st March was the date four years ago when the government imposed the closure of all pubs, restaurants, cafes and other hospitality venues – except for takeaway food – two days before the first national lockdown, which began on March 23. It was extraordinary, he said, to think that this was only four years ago. Even three years ago we were still in lockdown, the third and final imposed by the government. Though we have all tried to erase the memory of that period, some things remain.

The way we work changed permanently, perhaps the biggest shake-up in working practices we have ever seen, and not one brought about by legislation or trade union pressure. There is now a discernible shift back to the office, and many employers would like it to go further, but hybrid working is here to stay. He noted the evidence from his own “station car park indicator”, which has not got back to pre-pandemic levels of commuter parking even on Tuesdays, Wednesdays and Thursdays, and is noticeably quieter on Mondays and Fridays.

The economic impact of the pandemic is still with us, Smith also noted. The recession of 2020, largely as a result of the impact of that first lockdown four years ago, was the worst for more than 300 years. And, while the economy subsequently bounced back, gross domestic product is only about 1% above pre-pandemic levels, indicating that there has been very little growth over the past four years. The pandemic also added around half a trillion pounds to government debt as a result of policy measures such as the furlough scheme and the impact on tax revenues and public spending of the recession. Government debt was about 80% of GDP before the pandemic but is now almost 100%. This is the factor that is giving us the highest tax burden since 1948, driven by a rise in corporation tax to 25% and the long freeze on income tax and National Insurance allowances and thresholds. One question was whether the UK’s interventions during the pandemic were as good as they could have been. America did not have a furlough scheme but provided direct help to households and had a shallower pandemic recession and a much stronger recovery. There is now quite a debate about this.

Smith said he wanted to discuss four things, four questions:

1 – Are we really in recession, and what are the prospects for recovery?

There was a “technical” recession in the UK in the second half of last year, two successive small falls in GDP, but he said that people should ignore that. The big picture was that the economy had been broadly flat since the start of 2022 and, more troublingly, that GDP per head has fallen steadily. The world economy is also weaker than it should be, growing at 3% rather than the 4% norm, so operating on three out of four cylinders. But surveys so far for the UK this year are stronger and the economy should have recorded a bit of growth in the first quarter. It is still a battle between two forces – rising real wages versus the delayed effect of earlier interest rate hikes. Don’t expect anything more than modest growth this year, stronger next year.

2 – What about inflation?

The picture has changed dramatically for the better in recent weeks, with CPI inflation now down to 3.4% from a peak in late 2022 of more than 11%. At one time it appeared that it would be difficult to get all the way down to 2%, the target, very quickly. These were the “hard yards” once referred to by Andrew Bailey, the Bank of England governor. But they no longer look so hard and inflation will be down to 2% very soon, and should stay there.

3 – Where are Interest rates headed?

The only way is down, Smith said. Jeremy Hunt is looking for lower interest rates to unleash growth but it’s not quite as simple as that. They should come down 2 or 3 times this year, and further next year. They’ll settle at 3%- 4%. We won’t return to the near zero rates that prevailed between the financial crisis and the pandemic.

4 – What about this year’s elections?

The US election is probably more important, even for the UK. On this side of the Atlantic we find it astonishing that Donald Trump is standing, let alone that he could win. He has promised another burst of protectionism. In the UK, Labour is between 18 and 25 points ahead. Polls don’t narrow that much in the run-up to elections and that kind of lead, plugged into an electoral calculus machine, would suggest a Labour landslide, with a majority of 250 seats or more. It may not happen but something else needs to change to deprive Labour of a very big victory. The Tories need something dramatic to change, or they are heading for a very big defeat and business needs to prepare for a Labour government.

A lively discussion followed, with plenty of questions from the audience. Smith said his “skip” index, based on the number of builders’ skips in his street, had not yet picked up the growth message and was currently stuck at zero.

As always, a huge thank you to David for joining us. We appreciate you taking the time to share your latest insights and answering our questions on the current UK economy.