Former United States Secretary of Defence Donald Rumsfeld might have called Covid an ‘unknown, unknown.’ Nobody saw it coming and when it arrived nobody knew how to react. It was, in economic terms a black swan. Back to the present day and Mr Rumsfeld would probably say, when considering the outlook for 2024, we have a series of known unknowns facing us.
We know that we have instability and conflict in various regions, we know that crucial areas of global trade (energy, shipping) are topsy turvy and open to significant fluctuation and we know that we have key elections at home and abroad. What we don’t know is how these will turn out and what impact they may have on the economy – we can only guess. But perhaps coming into the year knowing and expecting continued turbulence puts us in a better position than how we have entered the last few years since 2020 – some may say blissfully ignorant. Maybe the global economy is becoming resilient to events – or maybe it’s business which is building resilience and able to cope with shocks a little better?
Let’s look at our known knowns first:
National Insurance Contribution (NIC) reduction
We start the year with a little bit of a boost for all earners with the reduction in NIC. Effective 1st January for employees the reduction in Class 1 NICs will put almost £150 back into the pockets of those earning £20,000 and around £750 into the pockets of those on £100,000. Class 2 NICs for the Self-Employed will be reduced from the beginning of the new tax year in April.
Rishi Sunak fired the starting pistol on the UK general election campaign trail almost immediately after the Christmas break, indicating that we will go to the polls in the ‘second half of the year.’ The United States will also go to the polls in November to elect a new (or not) President.
Earlier than usual, we’ll hear from the Chancellor on 6th March 2024. As noted above, this is a pre-election budget and so we’d normally expect a host of giveaways and major announcements. But we also know that the Chancellor has little room for manoeuvre as the end of 2023 may have seen us slide into recession, growth is lower than predicted and inflation remains high – albeit dropping.
Wars and conflict
There is open conflict in almost every continent, from the civil wars that have rumbled on for years in African and South American countries to the more recent conflicts in the middle east and Europe. Elections in Taiwan look set to reignite Chinese claims over the island state and North Korea remains belligerent.
The end of 2023 saw inflation dropping but still above target levels. Interest rates, which had climbed rapidly during the year, plateaued. There were early suggestions that we may see interest rates reduced during 2024, prompting some lenders to reduce their long-term mortgage rates and the fixed term saving rate on bonds dropping from just over 6% to around 5%.
Artificial Intelligence (AI) was the hot topic throughout 2023 and it looks set to dominate 2024 and beyond too. It’s here to stay and we must expect to interact with it as a technology through more of our daily lives.
It’s far from clear who will win a UK election. Labour lead in the polls as we enter the year, but pollsters suggest that the lead is not necessarily enough to hand them an overall majority. They could manage to become the largest party but that means less than plain sailing when pushing their agenda through the commons over an entire parliament. Could we see another coalition and what might this mean for economic and foreign policy?
The picture in the US is perhaps a little clearer with Donald Trump seemingly defying everything that is thrown at him in terms of legal challenges and claims of impropriety. Could we see him return to the White House in a geriatric battle royal between septuagenarian Trump and octogenarian incumbent Jo Biden. And given his previous stance on foreign policy what does a Trump White House look like with continuing conflicts involving Russia, Israel, China and potentially North Korea?
Jeremy Hunt may have to embrace a ‘go big or go home’ agenda for what could be his final budget in March. With covid debt and borrowing still casting a long shadow and slow economic growth, the usual handouts and headline grabbers such as lower income tax may not be available to him. So, the rabbit in the hat may look like a series of vote stabilising (rather than winning) measures. Expect to see Inheritance Tax (IHT), tax simplification, non-doms and VAT on the agenda. Early predictions say IHT will be scrapped and there’ll be an increase in HMRC funding in a bid to safeguard tax receipts and simplify calculation and collection. Recent reports suggest the VAT Threshold, which has not moved in years, could be reduced, or abolished to remove stagnation in the economy.
Wars and conflict
The conflicts in Ukraine and Gaza appear not to be ending anytime soon with the protagonists taking entrenched positions. A Trump White House presents a real risk to Ukraine military funding and the conflict in Gaza risks spreading beyond the borders of Palestine and Israel with sympathisers such as Yemen, Iran and Lebanon becoming increasingly involved or using it as a proxy for their own ambitions.
Interest rates will certainly not increase, and we can probably expect to see them drop slightly – towards the end of the year, subject to world and home events. However, any reduction will be fractions of a percent and the Bank of England have been clear that rates akin to those enjoyed for almost a decade will not be repeated any time soon. Savers can expect long term rates to stick around the 4-5% mark and mortgages should come down towards that level and stabilise. As a result of stability in interest rates might we see wage growth and inflation begin to align?
If Known Knowns and Known Unknowns remain the only two categories for 2024 then at least we can be alert to what may face us and we can start to plan accordingly. But as Donald Rumsfeld said in relation to Unknown Unknowns “If one looks throughout the history of our country and other free countries, it is this latter category that tends to be the difficult ones.”