UK’s ‘technical’ recession is politically toxic for Rishi Sunak

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Britain’s recession was variously described by economists on Thursday as “technical” and “shallow”, but in the brutal political arena ahead of a general election it was given a different name: “Rishi’s recession”.

The bare facts are that Rishi Sunak promised at the start of 2023 to “grow the economy” but new statistics showed that instead it shrank for two consecutive quarters in the second half of the year.

That means that the “R” word will be hanging around the prime minister’s neck until at least May, when the next quarterly GDP figures are released, unless last year’s figures are revised upwards in the meantime.

“This is Rishi’s recession,” said shadow chancellor Rachel Reeves, who told a press conference in London that the growth data showed that “something has gone profoundly wrong”.

Sir Ed Davey, Liberal Democrat leader, joined the chorus: “Rishi’s recession has savaged the British economy by decimating growth and leaving families to cope with spiralling prices.”

Sunak told business leaders this week the British economy had “turned the corner”; the prime minister hopes that inflation will resume its downward path and the Bank of England will soon start cutting interest rates. Wages are growing in real terms and the jobs market is strong.

But for now he is saddled with a record that saw a contracting economy in the second part of 2023 in spite of the fact that Britain’s GDP was given a boost by a growing population.

If it had not been for a big influx of migrants — net migration hit a record 745,000 in 2022 — Treasury insiders admit that the headline GDP figures would have been even worse.

Meanwhile, the GDP per capita figures were gloomier still. The Office for National Statistics reported that GDP per head fell 0.7 per cent in 2023, the first contraction since the financial crisis, excluding 2020, when strict pandemic restrictions heavily affected activity.

It is GDP per capita that ultimately boosts living standards and Reeves said that data was “deeply worrying news for families struggling to make ends meet and for business too”.

The Resolution Foundation think-tank estimated that GDP per capita is now 4.2 per cent off its pre-cost of living crisis path — equivalent to a loss of nearly £1,500 per household. It also estimated that this was the longest run of falls or stagnation in GDP per capita since 1955.

At the end of last year, UK GDP per head was still 1.5 per cent below its pre-pandemic level in the fourth quarter of 2019, ONS data showed. This compares poorly with a 5 per cent growth in the previous four years and with a 6.4 per cent expansion in the four years to the end of 2015.

Sunak and Hunt believe they can still convince voters that Britain is now “on the right track”; they argue it was inevitable that growth would stall in 2023 while the BoE was fighting inflation with high interest rates.

But time is running out, with an election expected in the autumn. “The economics are looking better but this is a frustrating political narrative,” admitted one Tory official.

Reeves said Labour would pull the country out of its growth stupor, but faced questions about her abandonment last week of the party’s flagship plan to boost the economy with a £28bn-a-year green investment plan.

She admitted that an incoming Labour government would face the same deep-seated problems as Sunak: “There are no short-cuts, quick fixes or easy answers,” she said.

The debate among economists about the “technical” nature of Britain’s recession was quickly drowned out by the political furore, but many argued that the country was facing stagnation rather than the “R” word.

They pointed to the fact that employment rose by about 100,000 in the second half of the year and real wages rebounded, expanding by an annual rate of 1.8 per cent in the three months to December.

Business and consumer confidence also expanded with the closely watched S&P PMI survey indicating private sector activity grew at the fastest pace in eight months in January.  

“It’s overly dramatic to label the decline in economic activity in the second half of 2023 a recession,” said Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.

Kallum Pickering, senior economist at Bank Berenberg, said the country slipping into a technical recession should not be “a cause for worry” partially because net trade was a large drag to growth.

ONS data showed that export volumes contracted by 2.9 per cent in the final quarter while imports fell by 0.8 per cent, subtracting 0.6 percentage points from the quarterly GDP growth figure.

“In all likelihood, the late-2023 softness should mark the bottom of the cycle for the UK,” said Pickering.

Ellie Henderson, economist at Investec bank, was “not too concerned” by Thursday’s data. “The contraction was mild, and it is essentially old news,” she said.

Henderson expects the economy to recover over the course of this year, with activity picking up again after the first quarter supported by various factors, including rising household disposable incomes and interest rate cuts.

“The UK may have been in a recession at the end of last year, but the outlook for the economy is brighter across 2024,” she added.