Initial reports on Thursday revealed that the U.K. economy entered a technical recession in the last quarter of the previous year. The Office for National Statistics disclosed a 0.3% contraction in the gross domestic product during the final three months, marking the second consecutive quarterly decline.
While there is no official recession definition, two consecutive quarters of negative growth generally signify a technical recession.
Economists surveyed by Reuters had anticipated a consensus forecast of -0.1% for the October to December period. In the fourth quarter, all three major sectors of the economy experienced contractions, with services decreasing by 0.2%, production by 1%, and construction output by 1.3%.
The overall estimate for the British GDP in 2023 suggests a mere 0.1% increase compared to the previous year. December witnessed a 0.1% contraction in output.
U.K. Finance Minister Jeremy Hunt attributed the economic challenges to high inflation, which he considers the “single biggest barrier to growth.” The persistently high inflation rates are compelling the Bank of England to maintain firm interest rates, hindering economic expansion.
“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low,” he continued.
In the U.K., inflation has significantly decreased, but it still surpasses that of the country’s economic peers and the Bank of England’s 2% target. This is putting pressure on household finances, with the headline consumer price index showing a 4% year-on-year reading in January.
Noteworthy is the contraction of GDP per capita, adjusted for population growth, which declined by 0.6% in the fourth quarter, following a 0.4% drop in the preceding three months. This trend persisted throughout the entire last year, leading to a seasonally-adjusted 0.7% reduction in GDP per head for the entirety of 2023.
“Shallow and temporary” recession
The data, according to Marcus Brookes, chief investment officer at Quilter Investors, most likely point to a “potentially shallow and short-lived one that may not reflect the true state of the economy,” which is predicted to see a “muted recovery” through 2024.
“U.K. GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions,” Brookes stated in an email.
“These factors affected the performance of the services and construction sectors, which are the main drivers of the U.K. economy.”
He pointed out that some of these obstacles are only transitory and have already begun to disappear, with January’s inflation data missing estimates for a resurgence.
“Over the coming months, we expect inflation to fall, potentially easing the pressure on U.K. households, and supporting the recovery of the consumer-driven economy,” Brookes continued.
Premier Miton Investors’ chief investment officer, Neil Birrell, expressed concern about the strength of the economy in the upcoming year in light of Thursday’s statistic and the lower-than-expected inflation data.
“Most sectors of the economy were weak, but the optimists will point to the fact that there is plenty of scope to cut interest rates should the current trend in inflation and growth accelerate.”
