Key Highlights:
- The ONS economic data shows the UK has entered a recession, with GDP contracting by 0.3% in Q4 2023, following a 0.1% decline in the previous quarter
- Throughout 2023, the British GDP is estimated to have grown by a mere 0.1% in comparison to 2022
- In 2023, the UK’s GDP only increased by 0.5% and is projected to rise by 0.6% this year
- According to analysts, the Bank of England is expected to reduce the base interest rate from its current level of 5.25% in the near future
The United Kingdom has officially entered a recession, with two consecutive quarters of negative growth reported in the third and fourth quarters of 2023, according to official figures released on Thursday, February 15, 2024. Economic data released by the Office for National Statistics (ONS) reveals that the UK has entered a recession, with a 0.3% contraction in GDP recorded for the final quarter of 2023, following a 0.1% decline in the previous quarter.
Across the primary sectors of the economy, the fourth quarter saw contractions, as per the ONS report, with services, production, and construction output declining by 0.2%, 1%, and 1.3% respectively. Throughout 2023, the British GDP is estimated to have grown by a mere 0.1% in comparison to 2022. December saw a 0.1% reduction in output.
United Kingdom Officially Enters Recession
Economic Data – Q3 & Q4 2023:
- Q3 2023 GDP Growth: -0.1%
- Q4 2023 GDP Growth: -0.3%
Sector-wise Performance – Q4 2023:
- Services Output: -0.2%
- Production Output: -1%
- Construction Output: -1.3%
U.K. Finance Minister Jeremy Hunt emphasized that persistently high inflation remains the foremost impediment to growth, compelling the Bank of England to maintain firm interest rates and hampering economic expansion.
Analysts characterize this recession as mild, yet the public continues to grapple with financial difficulties, particularly with escalating housing and energy expenses. Inflation stands at 4%, twice the Bank of England’s target, leading to a continual rise in the cost of everyday goods.
“Though the shallowness of this recession provides comfort, these figures also confirm that our economy remained locked in a cycle of persistent stagnation throughout 2023,”
-Suren Thiru, Economics director at the Institute of Chartered Accountants in England and Wales.
How Residents, Businesses, and Bill Payers are Coping with the Challenge?
After the heavy economic news of stagnant inflation and a contracting economy, people from Harlow, in Essex, shared their financial situations. Some said they could not buy meat at the grocery store, others complained that nothing was worth their money these days.
The difficulties are shared by businesses and those handling bill payments as well. Lord Stuart Rose, the head of supermarket chain Asda, said that to boost growth, there had to be more spending on infrastructure and less waste. He cautioned that “these things won’t be popular,” but “we have a low-growth economy or a no-growth economy.”
Julian Metcalfe, the co-founder of sandwich chain Pret A Manger, urged any business owners listening to Today to “do everything you can to look after your customers and staff” in tough times.
Mark Neale, the founder of retail store Mountain Warehouse, said he had “a record year”. He said his company was opening several stores across the country and hoped we were “well past the worst with inflation”.
Why the UK is Lagging Behind other Major Economies in Growth and Recovery?
Among developed countries, the UK has one of the highest inflation rates. The Bank of England has been increasing interest rates to 5.25% to lower the high prices. This makes borrowing costlier, which affects businesses and individuals, especially those with mortgages.
Therefore, people have been spending less, which means businesses get less money. The UK’s GDP depends on consumer spending for two-thirds of its value, so the economy contracts when this declines. The UK faced a recession in 2020 due to the Covid lockdowns.
The economy shrank by 10% that year, which was the UK’s worst economic performance in 300 years. However, the recession after the financial crisis of 2008 had a longer-lasting impact: it took the UK economy 5 years to recover to its pre-recession size.
UK Economic Overview
- Inflation Rate: UK has one of the highest among developed countries.
- Bank of England Response: Interest rates increased to 5.25% to control prices.
- GDP Dependency: Two-thirds of GDP relies on consumer spending.
- 2020 Recession: COVID-19 lockdowns caused a 10% economic shrink.
- Economic Recovery: 5 years post-2008 crisis for pre-recession size recovery.
- Recent GDP Growth: 0.5% GDP increase in 2023; projected 0.6% rise in 2024.
In 2023, the UK’s GDP only increased by 0.5% and is projected to rise by 0.6% this year. Darren Jones, the shadow chief secretary to the Treasury, said that GDP per person, a common measure of living standards, had been steadily dropping for the last year – the longest continuous record of family financial deterioration since the 1950s when records began.
GDP per person had been shrinking for 21 months in a row, the longest ever recorded, though not the most severe, resulting in a loss of £143 per person since March 2022 (from £8,393 to £8,250). The previous longest period of decline was during the financial crisis when GDP per person decreased for six successive quarters, by a total of £582.
The Decline of UK GDP Per Person
- Duration: 21 Months of Consecutive Decline
Key Statistics:
- Loss: £143 per person since March 2022
- Previous GDP Decline: £8,393 to £8,250
- Previous Record: Financial Crisis – 6 quarters of decline, £582 loss per person
Bank of England to Cut Interest Rates amid Recession Fears
According to analysts, the Bank of England is expected to reduce the base interest rate from its current level of 5.25% in the near future. This would make borrowing more affordable and saving less attractive – theoretically stimulating consumer spending and economic growth. The UK’s recession could prompt the Bank to lower interest rates earlier, in an attempt to mitigate the economic damage caused in 2023.
Economic Indicators and Monetary Policy in the UK
Bank of England Interest Rate:
- Current Level: 5.25%
- Expected Change: Reduction in near future
Food Inflation:
- Recent Peak (March 2023): 19.2%
- Current Rate: 7%
- First Monthly Decrease in over Two Years
Wage Growth:
- Average Earnings Excluding Bonuses: 6.2% annual increase (3 months to December)
- Outpaced Prices for 7 Consecutive Months
The ONS reported that food inflation dropped to 7% from a recent peak of 19.2% in March 2023. Food prices experienced their first monthly decrease in over two years. At the same time, wages have outpaced prices for 7 months in a row. It also stated that average earnings excluding bonuses increased at an annual rate of 6.2% in the 3 months to December.
Marcus Brookes, chief investment officer at Quilter Investors, said that the data suggest that the recession will be a ‘potentially brief and mild one that may not capture the true state of the economy,’ which is likely to undergo a ‘subdued recovery’ throughout 2024.
In summary, as the United Kingdom faces the onset of recession, the repercussions of financial strain impact the lives of residents, businesses, and billpayers alike. From the aisles of grocery stores to the boardrooms of major corporations, the challenges are palpable. Yet, amidst the economic turbulence, there is a glimmer of hope, a prospect of relief as the Bank of England considers measures to alleviate the strain. With the anticipation of interest rate cuts and indications of inflation easing, the nation is on the brink of change.
