UK enters technical recession as GDP falls 0.3% in Q4

High inflation, weaknesses in the labour market, low productivity growth and adverse weather conditions all weighed on activity.

Related topics:  Finance News
Rozi Jones | Editor, Financial Reporter
15th February 2024
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"Over the coming months, we expect inflation to fall, potentially easing the pressure on UK households, and supporting the recovery of the consumer-driven economy."
- Marcus Brookes, chief investment officer at Quilter Investors

UK GDP was down 0.3% over the three months to the end of December, a second consecutive quarter of negative growth, pushing the UK into a technical recession.

GDP fell by 0.3% in Q4, following a fall of 0.1% in the previous quarter. The concept of a 'technical' recession includes two or more consecutive quarters of contracting output.

High interest rates, bad weather, continued industrial action and poor retail sales all weighed on activity in the second half of 2023.

In output terms in Q4, there were falls in all three main sectors with declines of 0.2% in services, 1.0% in production, and 1.3% in construction output.

While the economy has now decreased for two consecutive quarters, across 2023, GDP is estimated to have increased by 0.1% compared with 2022.

Nicholas Hyett, investment analyst at Wealth Club, commented: “The UK officially exited 2023 in recession with economic growth in December weaker than economists had been expecting, leading to a second quarter of negative growth. With inflation lower than expected this week, the news the UK is in recession will lead to growing pressure for the Bank of England to cut interest rates.

"But, while recession is clearly bad news for the UK economy, it's worth bearing in mind that, as recessions go, this is still a very mild one, and might yet get revised out of existence altogether. Whether today's recession transforms into something that's remembered outside the pages of an economic history textbook remains to be seen."

Marcus Brookes, chief investment officer at Quilter Investors, said: “The latest figures from the Office for National Statistics show that the UK economy contracted by 0.1% in December, meaning that it shrank by 0.3% in the fourth quarter of 2023. This marks the second consecutive quarter of negative growth, technically putting the UK in recession, albeit a potentially shallow and short-lived one that may not reflect the true state of the economy, which is likely to see a muted recovery in the first quarter of 2024.

“UK 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. These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns.

“Some of these challenges are temporary and have already started to ease. The inflation rate held steady at 4% yesterday when many were predicting an increase. Over the coming months, we expect inflation to fall, potentially easing the pressure on UK households, and supporting the recovery of the consumer-driven economy. The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK's economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the UK’s recovery. As inflation steadies and then reduces, the Bank of England is more likely to cut interest rates to stimulate economic activity and investment.

“The UK economy faces challenges and uncertainties, but it also has many strengths and opportunities. It has a dynamic economy with a skilled and flexible workforce, and the UK is expected to overcome many of the current difficulties and emerge stronger and more resilient in the future.”

George Lagarias, chief economist at Mazars, added: “The UK is now officially in a technical recession. Lower inflation numbers earlier in the week did warn us that this may be the case for an economy that has spent a year teetering around zero-growth. This should come as no surprise given the global growth slowdown and weakness from Europe.

“However, I remain optimistic going forward, that the recession may not be a deep or long one. Firstly, the “recession”, is in fact technical, with the economy moving from slightly above-zero growth to slightly below-zero. It may signify a trend or be the result of macroeconomic volatility. Second, economic strength from across the Atlantic and a high deficit are keeping the prospect of a deep recessionary spiral away. Third, industrial production in Europe picked up in December, for the first time in nearly a year.

“Fourth, we are in an election year. In the age of monetarism recessions are, ultimately, a choice. If the government steps up spending, or if the -independent- Bank of England cuts interest rates faster than presently expected, then the recession should remain short-lived.”

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