Road to Recovery

While 2024 is hardly set to be a vintage year for the economy, a moderate recovery from 2023’s mild recession is expected. Lower inflation and less restrictive financial conditions should provide a boost, to both the wider economy and the activities of logistics firms. 

COMING OUT OF RECESSION

The UK economy fell into a modest recession in H2 2023, contracting by 0.1% in Q3 and 0.3% in Q4. However, Purchasing Managers' Index surveys have provided evidence of improved business activity in early 2024, with the Flash Composite PMI rising to a nine-month high of 53.3 in February. The services sector is leading the recovery, supported by loosening financial conditions, but its strength is contrasted by a still-contracting manufacturing sector.

While recent PMI readings are consistent with a return to economic expansion, growth levels are expected to remain very modest for at least the first half of 2024. Lower inflation, real wage increases and interest rate cuts should help the economy to gain stronger momentum in H2 but, nevertheless, even the most optimistic forecasters anticipate that annual GDP growth will be no more than 1.0% this year.

TAMING INFLATION

High inflation was the root cause of the emergence of recession late-on in 2023, but the inflation outlook has improved considerably in recent months. The CPI rate has steadily fallen from a peak of 11.1% in October 2022 to 4.0% in January 2024, and further falls are widely anticipated due to favourable base effects and decreasing utility prices. The Ofgem energy price cap will fall by 12% in April, and this may be enough to push CPI inflation below the Bank of England’s 2% target for the first time in three years.

While the Red Sea crisis has created some new price pressures, pushing up shipping costs and lengthening shipping times, this is unlikely to derail the downward path of inflation in the immediate term. As inflation moves closer 
to 2%, scope should emerge for the Bank of England to start bringing down interest rates over the summer. Most economists expect that the first cuts will come at either the June or August meetings of the Bank’s Monetary Policy Committee, with at least two more cuts anticipated by the year-end.

LABOUR MARKET LOOSENS

Market expectations for the timing of rate cuts have moved outwards slightly since January, partly due to evidence of continued tightness in the labour market. The unemployment rate unexpectedly decreased to 3.8% at the end of 2023, a very low level compared with previous recessions.

Nonetheless, most other indicators point to a gradual loosening of the labour market. Job vacancies have continued to fall, dropping from a high of 1.3m in mid-2022 to 0.9m in January 2024. Wage growth is also clearly past its peak, with annual growth in total earnings falling from 8.5% last July to 5.8% at the end of 2023. 

Although wage growth is easing, it remains high enough to remain a significant cost pressure for UK firms. With many logistics companies also disproportionately affected by higher shipping prices, many in the sector may feel that they continue to be impacted by rising costs, to an extent that belies falls in wider headline inflation.

BETTER YEAR FOR CONSUMERS

With wages rising faster than inflation, some of the pressure on household finances should ease over the coming months. Further boosts may also come from potential interest rate cuts and pre-election fiscal loosening. Average real household disposable incomes are forecast to rise this year, albeit they are not expected to recover to the levels seen prior to the cost-of-living crisis. 

Real wage growth should support moderate increases in consumer spending in 2024. Signs of a pick-up in consumer activity have already emerged early in the year, with January seeing strong retail spending figures. Sentiment appears to be gradually improving, with consumer confidence indicators reaching their highest levels in more than two years.

ONLINE RETAIL GROWTH STALLS

The rise of online retail has stalled, with the sector remaining in a period of consolidation following the turbocharged growth seen during the pandemic. Online has consistently accounted for roughly a quarter of all retail activity over the last year; its share of total sales in January 2024 was 24.8%, well down on the peak of 37.3% seen in February 2021.

Some of the growth forecasts for online retail produced in the midst of the pandemic now appear wildly unrealistic, but the sector still has the potential to grow at more sustainable levels over the next few years. Industry analyst ECDB projects that UK ecommerce revenues will grow by 4.4% per annum over the next few years, taking online’s market share to 30.6% in 2027. Alongside increasing moves towards on-shoring / nearshoring, growth on this scale should continue to steadily underpin ecommerce-driven demand for logistics property over the new cycle.

ELECTION YEAR

The looming general election will grab much attention in 2024, but it may not have a huge immediate impact on the economy. Labour’s move towards the political centre ground appears to leave less riding on this election than the last one. The party’s large lead in the polls means that a change of government is widely anticipated and unlikely to provoke a particularly strong reaction from financial markets or businesses. Indeed, any fallout from the UK election could be greatly overshadowed by November’s US election, depending on its result. 

Over the longer term, a new UK government could look to shift several policies affecting logistics companies with, for example, Labour pledging to renegotiate post-Brexit trade deals. However, the biggest concern could be the major fiscal challenges that appear to be lying in wait for whoever is elected, with post-election spending cuts or tax increases potentially needed to balance public finances.

SLOW RECOVERY AHEAD

Despite being an election year, 2024 should be less tumultuous for the economy than many years in recent memory. A recovery from 2023’s minor recession may already be underway, but the rebound is likely to be slow with higher interest rates continuing to drag on activity. Economic momentum should gather as the year progresses, and risks to the outlook stem mostly from global geopolitical events, rather than domestic politics.