Economic horizons | PLSA
Economic horizons

Economic horizons

16 February 2024

Paul Johnson, director of the Institute for Fiscal Studies, shares his views on key macroeconomic trends for 2024 with Maggie Williams.

Paul Johnson

What are some of the biggest macroeconomic trends that will affect pension schemes this year?

Firstly, we’ve got lots of macroeconomic uncertainty at present, including the situation in the Middle East, the effect on shipping costs, and what will happen to energy costs. There is also the question of whether we will see another shock to the economy. These uncertainties will underlie almost everything over the next year.

Assuming we don’t have another shock, inflation and interest rates are another area of concern. The market is betting on the Bank of England bringing inflation down more quickly than the Bank itself is suggesting at the moment. Inevitably, bringing interest rates down more quickly will affect the wider economy. Returns on gilts are already starting to fall, and that will set a benchmark for other investments.

Based on best estimates, we are looking at another year of economic stagnation – the Bank’s forecast, the Office for Budget Responsibility’s forecast and most of City expectations are that the economy will pretty much flatline this year and it will be yet another poor year for the economy. How that affects the stock market remains to be seen. I don’t think the central expectation is of a big recession at least, but it will not be much growth either. And then of course there is whatever happens post the General Election and its impact on economic policy.

Based on best estimates, we are looking at another year of economic stagnation.

Do you think the General Election will drive more uncertainty for schemes?

We always see some uncertainty around an election – but much of the political upheaval that we’ve experienced since 2016 has begun to dissipate. We don’t have the same turmoil in Parliament that we saw between 2016 and 2019, we don’t have Covid lockdowns, or the chaotic period at the beginning of this Parliament with multiple Chancellors and Prime Ministers. And we have an opposition party that looks very different from the one we saw in the run-up to the previous election.

So, my sense is that there is less uncertainty politically than there has been for at least the last eight years. There is more stability than there has been for a while. For example, this doesn’t look like the 2019 election where there were dramatically different manifestos being put in front of the population. If Labour had been elected then, there would have been a dramatically different path for policies and the economy. At that time, we also had a Conservative leader who was not very focused on the economy. I don’t think that is where we are now.

However, there is a good deal of uncertainty about the direction of fiscal and economic policy post-election because the choices and challenges facing the new government will be hard: the NHS, the social care system, local government, the justice system and others are really struggling. The current fiscal economic forecasts are based on incredibly tight spending plans over the next Parliament, and no-one wants to talk about raising taxes from what are already very high levels by historic UK standards.

The choices and challenges facing the new government will be hard.

So, the question of how whoever wins the next election will square that incredibly difficult circle is certainly a source of uncertainty. Will they have to borrow more than they are telling us about, and will debt therefore be higher? And will that create economic problems? Will the next government increase taxes which might cause a drag on the economy? Or will they do what’s pencilled into the spending plans and slash investment spending, which would be bad for the long term of the economy? Whoever wins will have to make these choices.

How do you think these trends will affect pension schemes?

I’m not really in a position to advise pension schemes on their strategies, but different people having different views on what will happen to interest rates creates an odd situation in which the market view is really quite different from what the Bank of England is suggesting in terms of the path of interest rates. I presume that different views about that path will result in different views and approaches for schemes. 

See Paul Johnson at our 2024 Investment Conference

Paul Johnson is director of the Institute for Fiscal Studies (IFS) and a member of the Committee on Climate Change. The IFS is widely considered to be the leading independent economic research and analysis organisation in the country. As well as analyses of the economy and future of government spending, Paul also considers the economics of climate change and the path to net zero, the effects of inequality, and the long- and short-term impacts of shocks including Brexit and Covid-19.

He is the opening speaker at the PLSA’s Investment Conference in Edinburgh from 27-29 February 2024

Economic Horizons: The UK’s Macroeconomic Landscape and implications for pensions, 27 February 2.15 to 3pm