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UK Fell Into Technical Recession in Second Half of Last Year - BLOOMBERG

FEBRUARY 15, 2024

(Bloomberg) -- The UK slipped into a mild recession in the second half of 2023, showing Prime Minister Rishi Sunak has so far failed to meet his pledge to grow the economy.

Gross domestic product fell 0.3% in the fourth quarter, more than the 0.1% drop economists forecast, Office for National Statistics figures released Thursday show. That followed an unrevised 0.1% decline in the previous three months, meeting economists’ technical definition of a recession, or two consecutive quarters of contraction. 

While the economy still grew 0.1% across the year as a whole, it was the slowest annual expansion the UK had seen since 2009, excluding the first year of the pandemic. The UK economy last posted a quarter of growth in the first three months of last year. 

UK bonds climbed for a second day, with 10-year yields coming off a two-month high close to 4.2% to fall below 4% for the first time in a week. Money markets boosted bets on the scope for monetary-policy easing this year, fully pricing three quarter-point cuts and a 10% chance of a fourth, while the first reduction is expected by August.

The pound slipped as much as 0.2% against the dollar at $1.2542, set for a third day of losses.

The recession, though widely anticipated, is further evidence that the Bank of England’s campaign to bring down inflation had taken its toll. The figures come at a particularly bad time for Sunak, with voters going to the polls in two parliamentary constituencies in England — the latest test of the opposition Labour Party’s strength ahead of a general election expected later this year. 

Sunak made growing the economy one of five key pledges after taking office in October 2022, along with cutting debt, halving inflation, reducing health services waiting lists and stopping boat migration across the English Channel. So far, he can only claim victory on his pledge to slow down price growth, something that the bank has far more influence over than the government. 

“The news that the UK slipped into technical recession in 2023 will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections,” said Ruth Gregory, deputy chief UK economist at Capital Economics. “But this recession is as mild as they come and timely indicators suggest it is already nearing an end.”

The milestone could nonetheless increase pressure on the bank to move more quickly toward rate cuts, which investors currently expect to begin by August. BOE Governor Andrew Bailey played down the significance of a technical recession this week, pointing to signs of an “upturn” in surveys covering the start of 2024, although the bank had also expected the economy to avoid contraction in the fourth quarter. 

What Bloomberg Economics Says:

“Britain’s GDP declined by more than expected at the end of last year, confirming that it fell into a technical recession in the second half of 2023. We remain of the view that the outlook for 2024 is brighter — something the Bank of England has also been keen to emphasize recently.”

-Ana Andrade (economist) 

Read full analysis here

Chancellor of the Exchequer Jeremy Hunt pointed to the impact of the BOE’s efforts to increase interest rates to a 16-year high of 5.25%, saying low growth was “not a surprise.” “There are signs the British economy is turning a corner,” he said, citing low unemployment and wages that are rising faster than prices.

The figures underscored wider weakness in the Group of Seven, with Japan unexpectedly slipping into recession and surrendering its status as the world’s third-largest economy to Germany. The German economy may shrink in the first quarter of the year, Bundesbank President Joachim Nagel said on Wednesday, raising the prospects of a recession in that country, as well. 

The UK figures released on Thursday suggest that the downturn has been felt more by individuals. On a per-person basis, the UK has been in recession since the second quarter of 2022, a decline concealed only by record migration. GDP per head has shown no growth for seven consecutive quarters, the longest period since records began in 1955.

“This is a proper recession just being hidden by having more people,” said Torsten Bell, chief executive of the Resolution Foundation.

In recent weeks, Sunak has urged voters to “stick with the plan,” warning that Labour leader Keir Starmer would bring the country back to “square one.” 

“The fact that we are now in recession shows his plan has failed and the Conservative Party’s run out of ideas for turning it around,” Darren Jones, Labour’s shadow chief Treasury secretary, said on Times Radio. 

Separate data released Wednesday showed that UK inflation held steady at 4% in January, defying economists’ expectations of an increase. Still, Bailey has taken a cautious approach toward cuts, with wages still rising well above a pace considered inflationary in the UK’s tight labor market. 

“The news the UK is in recession will lead to growing pressure for the Bank of England to cut interest rates,” said Nicholas Hyett, investment analyst at broker Wealth Club. “While recession is clearly bad news for the UK economy, it’s worth bearing in mind that, as recessions go, this is still a very mild one, and might yet get revised out of existence altogether.”

All three sectors of the economy shrank in the final quarter. Services contracted 0.2%, production 1%, and construction 1.3%, showing the downturn was broad-based. Household spending, government consumption and trade all dragged on growth.

Output per worker declined 0.6% in the fourth quarter compared to a year ago. The finance and insurance industry was the largest productivity drag in the three months to September, while administrative services and manufacturing industries made the largest upward contributions.

The ONS said that output contracted 0.1% in December, highlighting weakness in the retail sector and the industrial action taken by junior doctors. The statistics agency also downgraded its growth estimates for both October and November.

The UK economy has been hamstrung by the worst cost-of-living crisis in generations, as well as interest rates increases. One bright spot was an increase in business investment, which increased 1.5% following a fall of 2.8% in the third quarter. For the year as a whole, business investment was up 6.1%.

“The elephant in the room remains unaddressed, which is that Britain’s post-Covid, post-Brexit economy is struggling to discover its joie de vivre, with growth rather anemic compared to recent memory and against our main competitor, the Eurozone,” said Barret Kupelian, chief economist at PwC UK

--With assistance from Lucy White, Harumi Ichikura and James Hirai.

(Updates with Japanese, German growth concerns in 11th paragraph.)


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