The UK economy slipped into a recession in the final quarter of 2023. This marks two straight quarters of economic contraction, according to initial figures from the Office for National Statistics (ONS) shown Thursday.
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Gross domestic product (GDP) depleted by 0.3% in the October–December period. It is a steeper decline than the 0.1% consensus forecast by economists. The dip follows a 0.1% contraction in Q3, meeting the common definition of a technical recession.
All three main sectors of the British economy, including services, production, and construction, saw declines in output in Q4. The services sector contracted by 0.2%. Production fell by 1%, while construction output was down 1.3%.
For the whole of 2023, GDP grew by just 0.1%. In December, output declined by 0.1% month-on-month.
Persistently high inflation was singled out as the biggest drag on growth by U.K. Finance Minister Jeremy Hunt. UK inflation remains firmly above the Bank of England’s 2% target. This has forced the central bank to keep interest rates elevated, dampening economic activity.
With inflation projected to continue falling, potentially easing cost pressures on households, Marcus Brookes, chief investment officer at Quilter Investors, expects the consumer-driven economy to rebound over the coming months.
So while risks undoubtedly remain in the form of inflation and weak activity, the dip into a technical recession appears to be minor. With key drivers poised to rebound, the U.K. economy looks set for a muted recovery this year.
Sunak promised to get the economy growing as one of his key pledges to voters last year. His Conservative Party has dominated British politics for much of the past seven decades, with a reputation for economic competence. But Labour is now more trusted with the economy, according to opinion polls, opens new tab.
British households are due to see their first drop in living standards between one national election and the next since the Second World War, analysts have said.
Ruth Gregory, deputy chief UK economist at Capital Economics, said the GDP figures had more political significance than economic, with voters due to elect lawmakers in two constituencies on Thursday.
“The news that the UK slipped into technical recession in 2023 will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections,” Gregory said.
Finance minister Jeremy Hunt said there were “signs the British economy is turning a corner” and “we must stick to the plan – cutting taxes on work and business to build a stronger economy.”
The opposition Labour Party rejected those claims.
“The prime minister can no longer credibly claim that his plan is working or that he has turned the corner on more than 14 years of economic decline under the Conservatives,” Rachel Reeves, Labour’s top economy official, said.
Media reports said Hunt was seeking to cut billions of pounds from public spending plans to fund pre-election tax cuts in his budget, if penned in by tight finances.
The Office for National Statistics (ONS) said the economy grew 0.1% across 2023 compared with 2022. The BoE forecasts output will pick up slightly in 2024 but only to 0.25% growth.
Britain’s economy has been stagnating for nearly two years.
The COVID-19 pandemic triggered the deepest contraction on record over two quarters in early 2020 when the economy slumped by 22%. Before that, the global financial crisis sparked a severe recession that lasted just over a year, from the second quarter of 2008 through to the second quarter of 2009.
INTEREST RATE CUTS AHEAD?
Data on Wednesday showed inflation held at a lower-than-expected 4.0% in January, reviving talk among investors about a BoE rate cut as soon as June. But strong wage growth reported on Tuesday underscored why the BoE remains cautious.
Hunt said he was hopeful the central bank could start to cut borrowing costs by the “early summer.” Investors were pricing a roughly 68% chance on a first BoE rate cut at its June meeting.
Governor Andrew Bailey said on Wednesday that there had been some signs of an economic upturn in the economy but he still wanted more evidence that inflation pressures were abating.
“While the Bank of England’s focus will likely remain on price data, the bigger drop in output and the politics of being in a technical recession will no doubt become uncomfortable,” Sanjay Raja, chief UK economist at Deutsche Bank, said.
Economic output fell by 0.1% in monthly terms in December after 0.2% growth in November, the ONS said.
Manufacturing, construction and wholesale were the largest contributors to the decrease in GDP in the fourth quarter.
GDP per person has not grown since early 2022, representing the longest such unbroken run since records began in 1955.
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