UK economy ends 2023 in recession

Official data has finally confirmed what was probably the worst kept expectation in the market, namely that the UK economy ended 2023 in a technical recession. The Q4 growth reading of -0.3% follows the -0.1% print recorded for Q3, to leave the UK joining Japan as the only two members of the G7 to be currently experiencing two consecutive quarters of negative growth. Although output in December fell by only -0.1%, better than the expected -0.2%, downwards revisions saw a bigger than expected fall over Q4 as a whole. It is a dismal set of numbers that could not have come at a worse time for the UK government, as it faces having to call a general election sometime before January 2025 and ahead of which it has been staking its economic credibility on the claim that its policies have been growing the economy.

The fall in output over Q4 was broad based, with declines in activity seen in services, production and construction. And on the expenditure side, government consumption fell by -0.3% q/q, chiefly a consequence of the ongoing industrial action being taken by junior doctors in the health sector, while real household expenditure also fell, by -0.1% over the quarter and adding to the -0.9% decline seen over Q3. The savings ratio appears to have remained largely unchanged. For the year as a whole, UK GDP is estimated to have increased by just 0.1%, the weakest annual change in real GDP since the 2009 financial crisis (ignoring the covid-distorted 2020).

The chink of light in today’s report is the fact that the size of the contraction is small and may already be over. GDP reports are essentially backwards looking, while forward looking measures of activity, such as survey data, are pointing to growth re-emerging in Q1, albeit on a small scale. And with the labour market being shown as stronger than expected, wages now growing in real terms and consumer and business confidence returning to levels consistent with rising activity, it is maybe a little too dramatic to suggest the UK economy is facing a fully blown contraction. Rather, a period of stagnation looks more likely, with the economy showing only minimal or flat growth over the immediate quarters.

Whatever happens going forward though, today’s report will put more pressure on the Bank of England (BoE) to cut interest rates as soon as possible. But with this week’s employment report showing wages growth moderating only slowly, and yesterday’s CPI release showing inflationary pressures to be holding firm despite the interest rate rises delivered so far, the BoE is finding itself increasingly caught between a rock and a hard place. Pressure will also grow on the government to reduce the still growing tax burden, which combined with the worst cost-of-living crisis seen for over a generation, has contributed to consumer consumption faltering.

The potential saviour may be the recovery in real household disposable income that is expected this year. As confidence rises and interest rates fall, so real household incomes will rise, and with savings balances largely replenished to pre-covid levels, so much of this additional spending power will hopefully lead to an increase in consumption.

But however you approach it, the immediate outlook for the economy looks difficult, and the best outcome for 2024 may yet simply be to avoid a further contraction rather than posting any material growth.