Experts react as UK economy shrinks 0.3% to create technical recession

The UK economy shrank by 0.3% in the last three months of 2023 with all sectors showing a decline, according to Office for National Statistics data published today (15 February).

Compared with 2022, UK GDP increased by 0.1% in 2023, the weakest since 2009.

In early reaction, Danni Hewson, head of financial analysis at AJ Bell, said: “The fact that the UK slipped into recession at the end of 2023 isn’t a surprise considering the cost-of-living crisis that hobbled us all over the year, but the size of the slump is slightly larger than had been expected.

“Constrained budgets kept us from hitting the high street in December, with retail sales figures down to a level not seen since the pandemic lockdowns of January 2021, and a series of storms also took their toll.

“That said, recession is merely nibbling at the edges of the economy and there are already signs that this slump will go down in the record books as the shortest, shallowest recession to date.

“Psychologically it is likely to take a toll and even if we accept these numbers are backwards looking and the worst may be behind us, at least for now, already shaky confidence will be knocked.

“The word recession strikes a chord with all of us. We’ve lived through other downturns and felt the impact of those on our own lives, not least the post-pandemic malaise that’s still gripping the country.

“We can understand that every recession is different and that the numbers this time suggest a limited impact, but we can’t help but be wary. And whilst other economic indicators and surveys suggest that green shoots are already springing up, the ground they’re planted in is anything but fertile.

“The UK economy has been boggy for the last couple of years and all sectors have struggled to find their feet. The big question now is how will these figures play into the Bank of England’s determination of when interest rates should start to come down?

“With construction seeing the biggest decline in output in the third quarter there is an argument to be made that hikes have already done the job they were intended to do.

“But cutting interest rates won’t be a panacea. With growth over 2023 clocking in at the weakest since the financial crisis there are no easy answers.”

While Julian Jessop, economics fellow at the free market think tank, the Institute of Economic Affairs, said: "There are plenty of excuses for the weak GDP data – many other countries have also slipped into recession, the numbers may be revised, and leading indicators are already improving. But the news is bad enough that it should have some implications for policy too.

"In particular, the Bank of England expected the economy to be flat in the fourth quarter of last year. On top of a downward revision to GDP in the first quarter, this means that the economy is already 0.4 per cent smaller than assumed in the February Monetary Policy Report.

"The MPC's job is to worry about inflation, not growth, but the case for early rate cuts is now even stronger.
"There will also be more pressure on Jeremy Hunt to cut taxes in the Spring Budget. The Chancellor needs to be careful here. There is already some additional stimulus from the cuts in National Insurance in January and from the increases in pensions, benefits and the national minimum wage in April.

Jessop continued: "The key driver of the slump into recession is the increase in interest rates. It is important that the Chancellor avoids doing anything that might reignite inflation and encourage the Bank to keep rates higher for longer. But there is room for some well-targeted tax cuts that would both support demand and boost the productive potential of the economy.

"Nonetheless, the UK's problems clearly run deep, and a few tweaks to interest rates and tax rates won't fix them. The longer-term story is that the economy is facing two decades of stagnation. There is an urgent need for the government to pursue pro-growth policies across the board."

Marcus Brookes, chief investment officer at Quilter Investors, said: “UK GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions. These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns.

“Some of these challenges are temporary and have already started to ease. The inflation rate held steady at 4% yesterday when many were predicting an increase. 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. The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK's economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the UK’s recovery. 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.”