The UK fell into technical recession in the last three months of 2023, with widespread decline across the main sectors, which saw the economy shrink by more than was expected.
Official figures show UK GDP fell by 0.3% between October and December last year, following a fall of 0.1% in the previous quarter. The UK is technically considered to be in recession if GDP falls for two consecutive quarters.
Overall, the economy is estimated to have grown by 0.1% in 2023 compared with 2022.
The contraction in the fourth quarter was largely due to persistently high inflation, structural weakness in the labour market and low productivity growth as well as adverse weather conditions. The Office for National Statistics said there were falls in all three main sectors in the fourth quarter, with declines of 0.2% in services, 1% in production and 1.3% in construction output.
Abhi Chatterjee, chief investment strategist at Dynamic Planner, said: “This should not have come as a surprise for anyone. What was surprising was the widespread nature of the decline; services, production and construction all recorded negative quarters. This is confirmation of the fact that high interest rates are starting to affect the entire economy. It is interesting to note that the biggest contributor to the decline in services was from wholesale and retail trade, which is the impact of reduction in expenditure of households.”
Ed Monk, associate director at Fidelity International, said that while there is a “fair chance” the economy will turn positive again in the months ahead, there is no “cause for celebration” for now.
“This news will put extra strain on households, businesses and their workers and the public finances. Falling growth means demand is ebbing out of the economy. That puts downward pressure on inflation but there’s little sign the Bank of England will cut rates yet,” Monk explained. “Inflation remains twice its official target level and wages are still rising strongly. That’s good for households in the short term but may mean we’re living with interest rates at these levels for many more months.”
Experts agreed that the latest data will place increasing pressure on the government and the Bank of England to come up with policies to help the economy grow, with Chancellor Jeremy Hunt set to unveil his Spring Budget next month.
However, Marcus Brookes, chief investment officer at Quilter Investors, believes there is light at the end of the tunnel for the UK economy.
Brookes commented: “Some of these challenges are temporary and have already started to ease. 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. 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.”
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