Section 01: Executive summary
Falling inflation and upward wage pressure are resulting in household relief after two years of real wage decline. However, continued pressure from mortgage rates and debt accumulation means we expect consumer spending to remain suppressed.
1: Slow growth and recessionary pressure are causing the UK labour market to soften after two years of tight supply and rising demand following COVID.
2: Despite the softening labour market, we expect upward wage pressure to persist into 2024, albeit at a lower level than observed in 2023.
3: Wage pressure is primarily being driven by minimum wage increases and supply constraints.
4: At the same time, we have observed inflation falling faster than expected to 4.0% in Jan 2024.
5: Falling inflation combined with upward wage pressure has meant real wages rose in Q4 2023 for the first time in two years.
6: Despite this increase in real wages, the household cash position is still worse than in 2021, with households impacted by rising housing costs, taxation and servicing debt.
7: Households are not impacted equally; we are observing that upper-middle income households with private mortgages are most impacted (these households are predominately between the ages of 30-49).
8: Continued pressure on household cash – particularly households that have historically accounted for material spending power – will have a knock-on impact on consumer expenditure, which will continue to be constrained in 2024.
9: The result of this is likely to be continued low and stagnating growth in 2024 at a GDP level.
Section 02: The UK labour market is starting to loosen, leading to increased unemployment in some sectors
What is happening in the UK Labour market?
At its simplest, the labour market is dictated by two themes: the number of individuals available to work (supply) and the number of jobs available (demand).
2022 and 2023 saw a tight labour market, driven by labour shortages:
- The UK saw a decline in the number of available workers post-COVID.
- This low supply resulted in near-record numbers of vacancies. The average number of vacancies in 2023 stood at c.1.1m.
- This resulted in upward pressure on wages. Wage growth reached an estimated 6.5% in 2023, one of the largest annual increases outside the COVID period.
Labour supply: How did the supply change in 2023?
Between 2019 and 2022, we observed a net decrease of 162k workers, putting pressure on workforce supply. This trend reversed in 2023, easing supply shortages. However, we are still seeing growing numbers leaving the workforce due to illness.
Labour supply: How did net migration impact supply?
Recovery in labour market supply (seen in working age population growth on the previous slide) across 2023 has primarily been driven by net migration, which hit record highs across ‘22 and ’23.
New visa rules are expected to constrain supply:
- The earning threshold for overseas workers will increase from £26,200 to £38,700.
- The 20% going-rate salary discount for workers filling jobs in industries with labour shortages will be removed.
- Foreign care workers will no longer be able to bring dependants to the UK as part of their visa.
- These rules will combine with the already-announced restrictions on the ability of students to bring dependents to the UK.
Labour supply: What is the overall supply outlook for 2024?
During 2024, we believe labour supply will remain constrained. While we are seeing UK nationals re-entering the workforce since COVID, illness and restrictions on migration will impact supply.
“Those who are already economically inactive are becoming sicker, meaning they’re less likely to return to work. […] There is a nagging concern that [UK labour shortages] are the ‘shape of things to come.’"
– Lord Bridges of Headley
Labour demand: How is demand linked to economic growth?
Following a period of recovery post-COVID, GDP declined towards the end of 2023. Historically, there has been a strong correlation between the strength of the economy and labour demand.
“The UK’s recent experience is an extreme example of a global shift in macroeconomic volatility from demand to supply. On the demand side, there are clearer signs that softening activity is feeding into vacancies."
– UK Institute of Fiscal Studies
Labour market demand: What happened to demand in 2023?
We are already observing evidence of declining demand. Vacancies fell across 2023, and we have seen an uptick in unemployment and jobless claims.
Falling vacancy rates are leading to a rise in unemployment:
- The number of vacancies has sharply decreased, down by over 25% since its peak of 1.3m in Apr 2022.
- Over the same period, the number of unemployment claims has steadily increased, with an increase of c.5% since the beginning of 2023.
- This shift signifies a fall in labour market demand. Historic precedent suggests that we are likely to see the trends continue into 2024.
Labour market demand: What is likely to happen to demand in 2024?
Minimum wage increases coming into effect in April 2024 are expected to put pressure on sectors dependent on low-pay workers. This is likely to reduce demand to accommodate additional costs and therefore further stifle demand in some sectors.
Net-impact on the labour market in 2024
We expect labour demand to fall further during H1 2024, resulting in some small rises in unemployment. Continued supply constraints, combined with minimum wage increases, are expected to keep wage growth high.
Continued supply constraints and minimum wages keep wage growth high:
- Continued pressure on supply due to cuts in net migration and long-term illness…
- …means that despite falling demand, a significant increase in unemployment is not expected.
- Wage growth is expected in 2024 (albeit lower than 2023) driven by minimum wage policies and supply shortages.
Net impact on the labour market in 2024
Overall, unemployment is set to rise slightly in 2024, with variations across different industries. Supply constraints will limit increases in high-skilled sectors, while falling demand, largely due to wage factors, will drive unemployment in low-skilled sectors.
Section 03: UK inflation will continue to fall, but we expect it to bottom out above the 2% Bank of England target
UK inflation
UK inflation dropped faster than expected during the second half of 2023, driven by a decline in housing and energy costs. Gas and electricity prices have been at their lowest levels over the past two years during Q4 2023.
Forecast inflation
We forecast that inflation will continue on a downwards trajectory in 2024. This will primarily be driven by falling commodity and agriculture prices.
Medium and long-term inflation prospects
In the medium and long-term, we believe UK inflation is set to remain elevated at a range of 2.5 - 4% due to inherent structural factors that are likely to persist.
“Based on the drivers of medium and long-term inflation, there is a question as to whether monetary policy in isolation can still be used to drive down rising prices. Other policy measures will likely need to be introduced to prevent inflation from persisting in the upcoming decade."
– Gee Lefevre, Senior Managing Director, Teneo
Section 04: Continued wage growth will provide some household relief, but expenditure remains constrained
Real wage impact
Declining inflation coupled with growing wages has resulted in real wage growth for the first time since 2021. This trend is expected to continue across 2024 and 2025.
Household income
While rising real wages are a positive sign, it does not necessarily imply increases in household wealth levels, which are impacted by rising housing costs, taxation and servicing debt.
Household net cashflow
Teneo’s household net cashflow analysis considers costs that are not included in real wage calculations to give a true reflection of the relative cash position of a household.
While real wages are rising and growth is expected to remain above inflation in 2024, households’ cash position will be below2021 levels due to rising mortgage costs and income tax band freezes, which pushes households into higher tax brackets.
2023 saw higher income households facing the greatest amount of household cash pressure, and while lower-income households saw some relief, this was not enough to counteract the significant reduction seen across 2022.
Pressure on higher income households has been driven by increasing mortgage costs, with private mortgage holders seeing their housing costs increase by an avg. of 17% p.a.
The level of exposure to inflationary pressures seems to be higher amongst the 30-49 year old demographic, largely due to rising mortgage costs and limited increases in disposable income.
Section 05: Despite small increases in real wages, we expect consumer spending to be constrained
What is likely to happen to spending in 2024?
Despite the recovery in household incomes expected for 2024, we do not anticipate this to translate into significant increases in consumer spending.
Consumer spending and behaviour changes
Consumers have indicated that they expect to spend less on eating out, clothing and leisure travel, and the majority are feeling less secure financially as they enter 2024 vs. 2023.
Credit card default rate
Alongside reductions in spending, we are beginning to see rising credit card defaults indicating that consumers are still repaying historical purchases and potentially postponing new purchases.
Credit card users experience financial difficulty:
- c.32% of UK credit card users always only pay the minimum amount. While this group generally has a low credit card limit, they are prone to getting into financial difficulty.
- Buy Now Pay Later (BNPL) use is rising, with c.48% of UK adults using it in 2023. Of those who missed or made a late payment in the last 12 months, c.29% borrowed money to make repayments, generating further debt.
Mortgage default rate
Mortgage arrears are rising, highlighting the pressure some households are facing to keep up with repayments. Large increases in arrears across the market may trigger upticks in repossessions.
Mortgage arrears will continue to rise with more homeowners needing to refix their rates:
- The number of mortgages in arrears is expected to increase by approximately 8% between Q1’24 and Q4’25. This is due to the growing number of homeowners that will need to refix their interest rate since the rate rises.
- The Bank of England is expected to start reducing interest rates in 2024, causing the first lenders to reduce mortgage rates towards the end of 2023. For 2024, the rates are expected to drop below 5%, but this is still significantly higher than the December 2021 average of 2.24%.
Section 06: What does this mean for H1 2024?
GDP forecast
Pressure on household spending is impacting GDP, partly causing the technical recession in Q4’23. We expect low and stagnating growth to continue in 2024.
