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There are green shoots in the overall economic picture, although the prevailing mood among charity trustees and leaders is generally one of continued caution when it comes to finances. Talk of charity closures, charity mergers due to financial distress or examples of financial warning signs in the charity sector have been louder over recent months. The notion that a charity’s resources cannot be overcommitted is therefore very much in the foreground.
The focus on income and costs is combined with charities also reviewing their assets and liabilities. An ability to be agile, and knowing which levers can be pulled – and over what timeframe – where needed, can be particularly helpful. With a changeable risk profile, there should be constant vigilance over the level of reserves and liquidity.
There has been a further uptick in the level of economic activity, with the Office for National Statistics (ONS) reporting that the UK economy grew by 0.4% in March 2024. While we have moved past the UK’s short-lived recessionary episode, UK households may not have seen much meaningful improvement in living standards in the last two years, with the UK economy only 0.9% larger than it was in March 2022.
Slow growth
Over the short-term, we expect the trend of a pick-up in economic activity to continue. The Organisation for Economic Co-operation and Development (OECD) expects UK economic activity to grow by 0.4% this year and 1% next year. However, the OECD’s forecasts show the UK is stuck in the “slow growth lane”, when compared to other large European economies.
The annual growth in regular pay from the ONS remained at 6.0% in the three months to March 2024, and easing inflation pressures means that pay levels continue to grow in real terms. The increase in the National Living Wage from April 2024 adds further upward pressure to wage growth. This trend of pay growth in real terms is therefore likely to continue throughout 2024. At the same time, the latest labour market data also indicates that the labour market is cooling. The unemployment-to-vacancies ratio, a key indicator of labour market tightness, has increased to 1.6, its highest level since mid-2021.
The Bank of England’s Monetary Policy Committee voted to hold interest rates at 5.25% in May. The Bank of England has been clear that interest rates will only be cut when there is confidence that inflation will return to and stay at the 2% target. However, the mood appears to be shifting away from rate hikes and more in favour of rate cuts over the coming period.
Daniel Chan is a director at PwC