The UK economy is now in a recession due to a decline in spending by households in response to high-interest rates and rising costs of living. The Office for National Statistics (ONS) reported that gross domestic product (GDP) fell by 0.3% in the last three months of 2023, which was more than expected. This was due to a decline in all main sectors of the economy and a collapse in retail sales leading up to Christmas. This follows a 0.1% drop in the third quarter, which confirms two consecutive quarters of falling national output, meeting the technical definition of a recession.
This confirmation of a recession is a blow to the government, which is facing an election in less than a year. It is also an embarrassment to Rishi Sunak, the chancellor after the prime minister made growing the economy one of his five priorities for government at the start of last year. Rachel Reeves, the shadow chancellor, said that the news will be deeply worrying for families and businesses across Britain.
The ONS stated that growth throughout 2023 was estimated at 0.1%, which is the weakest year since 2009 during the financial crisis, excluding the economic collapse in 2020 during the Covid pandemic. All the main sectors fell on the quarter, with manufacturing, construction, and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.
Economists had anticipated a shallow recession at the end of last year as households came under pressure from higher borrowing costs and rising prices for everyday essentials, forcing cutbacks elsewhere. Widespread strikes across the economy and heavy rainfall also dampened activity.
However, recent snapshots from the economy have shown a rebound in consumer confidence since the start of this year, buoyed up by the prospect of interest rate cuts from the Bank of England as inflationary pressures cool. Andrew Bailey, the Bank’s governor, this week downplayed the significance of the quarterly GDP figures, suggesting there were signs of an “upturn” in the economy that would become clearer in the months ahead.
The chancellor, Jeremy Hunt, said that high inflation is the biggest barrier to growth, which is why having it has been their top priority. While interest rates are high, so the Bank of England can bring inflation down, low growth is not a surprise. But there are signs that 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. Although times are still tough for many families, they must stick to the plan of cutting taxes on work and business to build a stronger economy.
The latest snapshot from the ONS indicated weakness across much of the economy at the end of last year, with a fall in GDP amid a tough Christmas shopping period for retailers, strikes by junior doctors, and heavy rainfall. Reflecting on the pressure on household spending due to the cost of living crisis, the ONS said that output in the UK’s dominant services sector had fallen for three consecutive quarters, with a drop of 0.2% in the last three months of 2023.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said that although the shallowness of this recession provides comfort, these figures also confirm that the economy remained locked in a cycle of persistent stagnation throughout 2023 as a myriad of headwinds, including high inflation, weighed heavily on activity.