UK enters recession after economy shrinks further than predicted

The 0.3 per cent fall in GDP was worse than the 0.1 per cent forecast

London's financial district. The latest figures are a blow to British Prime Minister Rishi Sunak who has prioritised growing the economy. Bloomberg

Official figures show that the UK entered recession in the second half of 2023 after the economy shrank 0.3 per cent in the three months to December.

The fall in gross domestic product (GDP) in that period was worse than the 0.1 per cent predicted by experts.

It came after data from the Office for National Statistics (ONS) showed the economy also contracted by 0.1 per cent between July and September, meeting the official definition of two consecutive quarters of decline in a country's GDP.

It is the first time the UK has entered recession since the first half of 2020, when the initial Covid-19 lockdown sent the economy plunging into reverse.

The figures are a blow to Prime Minister Rishi Sunak, who has promised to grow the economy as one of his five priorities.

Liz McKeown, ONS director of economic statistics, said: “Our initial estimate shows the UK economy contracted in the fourth quarter of 2023.

“While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.

“All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth.”

Responding to the news, Chancellor Jeremy Hunt said that forecasts pointed to stronger growth in the coming years.

“There are signs the British economy is 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,” Mr Hunt said in a statement.

“Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy.”

Anna Leach, deputy chief economist at the Confederation of British Industry (CBI), said the data brings to a close a “pretty stagnant year” for UK economic growth.

“The CBI's most recent surveys suggest this year has started better than last year ended, with expectations for services and manufacturing in positive territory and the drag from higher interest rates expected to diminish.

“Better-than-expected real earnings growth will support consumers against the headwind of higher interest rates. But firms remain under pressure from higher borrowing costs, higher prices, weak demand and ongoing challenges recruiting the workers they need to grow and invest.

“There are multiple growth opportunities across the UK economy this year. As we head towards the budget in March, we're looking for action to support labour market participation and investment so that opportunities in high-growth industries like net zero can be fully realised.”

Stuart Cole, Chief Macro Economist at Equiti, said the “only chink of light” is the fact that the size of the contraction is small.

“Many forecasters are suggesting that [the first quarter] could see the economy manage to return to growth or remain flat on the quarter, albeit with any growth seen likely to be meagre, and pointing to the UK economy being in stagnation rather than entering a full-blown recession,” he said.

Mr Cole added that whatever the outcome, the data puts more pressure on the Bank of England to cut interest rates “as soon as possible”.

“But with this week’s employment report showing the labour market to be stronger than previously thought, and yesterday’s CPI release showing inflationary pressures to be holding firm despite the interest rate rises delivered so far, the BoE is very much caught between a rock and hard place,” he said.

Martin McTague, national chairman of the Federation of Small Businesses, said news of the technical recession “will just confirm what many small firms have been saying for some time now – it's very tough out there”.

He added: “Small firms are grappling with high interest rates, energy costs much greater than they were a couple of years ago, and weak consumer demand.

“Two in five small firms said their revenues decreased over the final quarter of last year, with only a third saying they increased, showing that the shine has definitely come off the so-called 'golden quarter', to small firms' detriment.

“The government needs to foster an environment where small firms can grow, to the overall benefit of the economy, and to put this period of stagnation and shrinkage behind us once and for all.”

The shadow chancellor Rachel Reeves said Mr Sunak's promise to grow the economy is now in tatters.

“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.

“This is Rishi Sunak's recession and the news will be deeply worrying for families and business across Britain.

“It is time for a change. We need an election now to give the British people the chance to vote for a changed Labour Party that has a long-term plan for more jobs, more investment and cheaper bills.

“Only Labour has a plan to get Britain's future back.”

Sterling weakened moderately against the dollar and the euro shortly after the GDP data release.

The Bank of England has said it expects the economy to pick up this year.

Martin Beck, chief economic adviser to the forecasting group EY Item Club, said: “Recent activity surveys signalled a recovery in momentum at the start of this year, and while industrial action in the health sector will hold back a revival in activity in first quarter, the ingredients are in place for a return to growth.

“Lower inflation has contributed to real pay rising again, falling wholesale gas prices will feed through to household energy bills from April, and financial conditions have loosened in advance of expected Bank of England rate cuts.

“Moreover, the prospect of tax cuts in the spring budget means fiscal policy should become less restrictive.”

But he said when interest rate cuts come, the effect will not be felt immediately and will “take time to boost growth”.