Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK entered a technical recession at the end of 2023, official figures showed on Thursday, dealing a serious blow to Rishi Sunak’s pledge to “grow the economy”.
Labour claimed the prime minister’s promises on the economy were “in tatters” after gross domestic product contracted more than expected in the last three months of last year.
GDP fell 0.3 per cent in the final three months of 2023 compared with the previous three months, following a 0.1 per cent decline in the third quarter, according to data published by the Office for National Statistics.
Two consecutive quarters of contracting GDP is commonly defined as a technical recession, though many economists believe stagnation is a better description absent a sharper or more sustained downturn.
Traders increased bets on the Bank of England cutting interest rates from 5.25 per cent. Swaps markets are pricing in three quarter-point rate cuts this year, with a 75 per cent probability of the first cut being delivered by June, up from around 65 per cent before the GDP data was released.
Interest rate-sensitive 2-year gilt yields fell 0.06 percentage points to 4.5 per cent and the FTSE 100 index of blue-chip stocks rose 0.2 per cent in anticipation of interest rate cuts. Sterling edged down 0.2 per cent to $1.254.
Rachel Reeves, shadow chancellor, said Sunak’s promise at the start of 2023 to “grow the economy” was “now in tatters”.
She said: “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 that has left Britain worse off.”
But chancellor Jeremy Hunt said there were signs the British economy was “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 added.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
Economists polled by Reuters had forecast the economy would contract by 0.1 per cent in the final quarter as high borrowing costs, inflation and strikes hit activity.
In 2023, the economy largely stagnated as it grew only 0.1 per cent. This was well below the 2.5 per cent expansion registered in the US, and weaker than the 0.5 per cent growth of the eurozone.
The figures look worse taking into account the increase in the UK’s population. Output per head contracted by 0.7 per cent in 2023, falling in every quarter of last year at an accelerating pace and has not grown since the first quarter of 2022.
James Smith, Resolution Foundation research director, said: “Britain has fallen into recession, and a far deeper living standards downturn.”
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
The figures create a challenging backdrop for Hunt as he prepares for a March Budget. He is considering slashing billions of pounds from public spending plans to fund pre-election tax cuts in an effort to boost the Conservative party’s re-election chances.
The data comes as the Tory party risks losing two seats in by-elections on Thursday in Wellingborough, Northamptonshire, and Kingswood, near Bristol.
The ONS said all the main sectors fell in the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.
There was a fall in the volume of net trade, household spending and government consumption in the final quarter, only partially offset by an increase in investment.
The ONS said that in December output was down 0.1 per cent from the previous month, softer than the 0.2 per cent contraction forecast by analysts.
Earlier in the week, Andrew Bailey, BoE governor, warned against putting “too much weight” on the economy slipping into a technical recession as it was expected to be “very shallow”.
Sanjay Raja, chief UK economist at Deutsche Bank, said the contraction in the fourth quarter represented a “meaningful miss on GDP” for the BoE’s Monetary Policy Committee.
“There’s clearly more spare capacity in the economy than assumed in their recent projections,” he said, adding that the data would “no doubt become uncomfortable especially with the bank rate at highly restrictive levels”.
In February, the BoE upgraded its forecast for 2024 growth, which it now says will be 0.25 per cent — up from its previous prediction of zero growth. It forecasts 0.75 per cent growth for 2025.
The GDP figures follow UK inflation data published on Wednesday that showed price growth at 4 per cent in January, the same rate as December and lower than forecast by the BoE.
However, on Tuesday, official data also revealed that pay growth was still strong, raising concerns about the persistence of underlying price pressures.
Additional reporting by Mary McDougall
Source: Economy - ft.com
