UK economy fell into recession

The UK economy slipped into a recession at the close of the previous year, with households tightening their belts amid a cost-of-living crisis, delivering a setback to Rishi Sunak’s pledge to spur growth. The Office for National Statistics (ONS) reported a larger-than-expected 0.3% contraction in gross domestic product (GDP) for the three months ending in December, attributed to declines across major sectors and a collapse in retail sales leading up to the holiday season. This decline followed a 0.1% drop in the third quarter, officially marking a second consecutive quarter of negative national output, meeting the technical definition of a recession.

The confirmation of a recession could prove embarrassing for the prime minister, especially with an anticipated general election this year, given that fostering economic growth has been one of his key government priorities. Rachel Reeves, the shadow chancellor, criticized Sunak’s commitment, asserting that the promise was now “in tatters” after years of economic stagnation under the Conservative government.

The ONS revealed that the overall growth for 2023 stood at an estimated 0.1%, marking the weakest performance since the 2009 financial crisis, excluding the economic contraction in 2020 during the COVID-19 pandemic. Highlighting the severity of the economic challenges, economic growth per capita faced a continuous decline for seven quarters, representing the worst performance since records began in 1955.

Liz McKeown, the director of economic statistics at the ONS, outlined that all major sectors experienced a decline in the quarter, with manufacturing, construction, and wholesale trade being significant contributors to the downturn, partially offset by increases in the hospitality and vehicle rental industries.

Economists had anticipated a modest recession toward the end of the previous year due to rising borrowing costs and increased prices for essential goods. Strikes and adverse weather conditions also contributed to dampened economic activity. However, recent indicators suggest a rebound in consumer confidence since the beginning of this year, fueled by expectations of interest rate cuts from the Bank of England as inflationary pressures ease.

Chancellor Jeremy Hunt attributed the low growth to high inflation, emphasizing the government’s priority of halving inflation. He expressed optimism about signs of the British economy turning a corner, citing forecasts of strengthened growth, rising wages outpacing prices, reduced mortgage rates, and low unemployment.

The Bank of England is expected to start reducing interest rates as early as this summer to counter concerns about economic strength after 14 consecutive increases in response to surging inflation. Despite a current growth forecast surpassing that of France and Germany at 0.7%, the UK economy still lags behind the US and several other advanced economies. The ONS noted that while the UK economy is about 1% larger than its pre-pandemic level, it trails behind all other G7 countries except Germany.

The recent ONS report depicted weakness across various sectors of the economy at the end of the previous year, with GDP contraction reflecting a challenging Christmas shopping period for retailers. Amid the cost-of-living crisis, the services sector, a key component of the UK economy, experienced a drop in output for three consecutive quarters, declining by 0.2% in the final quarter of 2023. Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, acknowledged the mild nature of the recession but underscored that the UK economy remained stuck in a cycle of persistent stagnation throughout 2023, influenced by various headwinds, including high inflation.

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