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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Rishi Sunak’s promise to grow the economy ‘in tatters’ as UK enters technical recession – as it happened

GDP United Kingdom Recession Economy United States
The Canary Wharf business, financial and shopping district of London, U.K.
The Canary Wharf business, financial and shopping district of London, U.K. Photograph: Bloomberg/Getty Images

Closing post

Time for a recap…

The UK economy fell into recession at the end of last year as hard-pressed households cut back on spending amid the cost of living crisis, in a heavy blow to Rishi Sunak’s promise to kickstart growth.

The Office for National Statistics said gross domestic product (GDP) fell by a larger than expected 0.3% in the three months to December after a decline in all main sectors of the economy and collapse in retail sales in the run-up to Christmas.

It followed a drop of 0.1% in the third quarter, confirming a second consecutive quarter of falling national output – the technical definition of a recession.

Official confirmation of a recession will embarrass the prime minister before a general election expected this year, having made growing the economy one of his five flagship priorities for government.

Rachel Reeves, the shadow chancellor, said Sunak’s promise was “in tatters” after years of economic stagnation under the Conservatives.

She said:

“This is Rishi Sunak’s recession, and the news will be deeply worrying for families and business across Britain.”

The ONS said growth over the course of 2023 as a whole was estimated at 0.1%, the weakest year since 2009 during the financial crisis, excluding the economic collapse in 2020 during the Covid pandemic.

More here:

Here’s the rest of today’s business news:

The economic storm clouds over Germany are darkening.

Germany’s DIHK chambers of industry and commerce warned on Thursday that Europe’s biggest economy will shrink by 0.5% this year, in a second year of recession.

This will mean Germany’s worst downturn in two decades, and only the second time in Germany’s post-war history where the economy contracted for two years in a row, Reuters reports.

A DIHK poll of more than 27,000 companies showed that of those surveyed, 35% expect business to deteriorate in the next 12 months with only 14% expecting an improvement, as high energy prices, bureaucracy, a skilled workers shortage and weak domestic demand weigh on economic output.

DIHK says:

“The bad mood among companies is becoming more entrenched.”

Common Wealth: GB Energy can make energy transition cheaper

Rachel Reeves was right to stress the economic potential of Great British Energy today, says Mathew Lawrence, Director of think tank Common Wealth.

Lawrence says:

Direct public investment is the fastest and most reliable route to cheap renewable power.

With sky high electricity costs a barrier to economic recovery, and a key competitive weakness, secure and low cost clean energy is a key step toward a stronger economy.

But maximising its potential will require going further — significantly building on Labour’s plans to deliver more public investment in clean power this decade.

Common Wealth have also analysed the financial immpact of GB Energy. And they’ve concluded that it could save up to £1bn on interest savings alone compared to using corporate borrowing to fund renewable energy infrastructure.

In a new report, they say:

The report calculates that renewable investment financed out of Labour’s announced £8.3bn initial capitalisation of GB Energy would save between £125-208m per year on interest alone, for every year that the debt was being serviced, relative to if that investment was financed by corporate borrowing.

Sky News’s Ed Conway has been crunching today’s monthly GDP data, and found that the UK economy failed to grow last year:

Updated

Norman Lamont, who served as Chancellor of the Exchequer during the UK recession of the early 1990s, argues there’s ‘light at the end of the tunnel’ today.

Speaking to BBC Radio 4’s World at One, Lord Lamont said:

“I think people ought to be realistic about this. We have an almost perfect storm.

We are coming through it, I think there is light at the end of the tunnel now and we just need to hold our nerve.”

Lamont does have form for economic optimism. Back in October 1991, he was ridiculed for claiming to see green shoots of recovery sprouting – though the recovery did indeed start the next year.

As Mrs Lamont apparently pointed out, “You don’t get green shoots in the autumn.”

Updated

Back in the UK, Michael Kitson, associate professor in International Macroeconomics at the University of Cambridge’s Judge Business School, says the government lacks a coherent policy for economic growth.

Following Britain’s drop into a technical recession today, Kitson says:

“Although the importance of the latest figures should not be exaggerated (especially as they are often revised), the data adds to the broader picture of economic malaise in the UK. According to the IMF, the UK economy is expected to grow by only 0.6% in 2024, well below the growth rate of 1.5% for all the advanced economies.

The Bank of England may give the economy a minor boost by reducing interest rates in 2024, but it must be emphasised that the Bank’s remit is to control inflation and not to stimulate growth.

Also, the Government has no coherent policy to grow the economy although it may resort to some tax cutting in advance of the general election to curry favour with the voters.”

Over in the US, spending in shops, bars and restaurants has fallen more sharply than expected.

US retail and food services sales dropped by 0.8% month-on-month in January, a rather larger fall than the 0.2% decline which economists expected.

This may show that consumer demand in the world’s largest economy is weakening, in the face of high interest rates.

Stock market reaction to the UK’s fall into recession remains muted, with the pound still slightly lower and shares a little higher.

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, says this shows investors are neither shocked nor concerned at today’s GDP figures.

Mui says:

It is true the optics are not great, but against the backdrop of a tight labour market with unemployment rate of 3.8%, the UK economy hardly falling off a cliff.

We have always felt that the UK is more susceptible to economic vulnerability due to its interest rate sensitivity. 2024 is unlikely to be a smooth ride for the UK economy as more homeowners are remortgaging into significantly higher interest rates. That said, there are also reasons for optimism due to the prospects of rate cuts later in the year as disinflation continues.

Wages are now outpacing inflation which should give employees more purchasing power. Home prices are rising again monthly, defying gloomy predictions.

Bank of England policymaker Megan Greene has said she wants to see further evidence that inflation is fading, before considering voting to cut interest rates.

Greene is one of six BoE policymakers who voted to leave rates on hold this month, having previously voted to raise borrowing costs.

Speaking at ratings agency Fitch today, Greene predicts that monetary policy will remain at restrictive levels for some time, to force inflation down to the 2% target [it remained at 4% in January].

Greene says:

Given recent developments in demand and inflation, it’s clear that monetary policy is restrictive in the UK. But in light of the persistence of UK wage and services price pressures, which stand out in international comparisons, I think policy will need to remain restrictive for some time in order for inflation to sustainably return to target.

Recent signs of persistence starting to ease are encouraging, and I judge that current policy is sufficiently restrictive to bring inflation back to target in the mediumterm. I would need to see further evidence that inflation persistence is less embedded than previously feared before I would consider voting to loosen policy.

Greene also explains that the UK has faced at “double whammy” – a terms of trade shock even larger and longer lasting than in the EU, alongside a tight labour market like in the US.

That means that “inflation persistence” is a greater threat in the UK.

She also points out that shocks from Brexit and the pandemic have left UK supply much weaker than in the US in recent years.

NIESR: economy will grow this quarter

NIESR, the economic forecasting institute, have predicted the UK economy will return to growth in the current quarter.

They forecast GDP will rise by 0.2% in the January-March quarter.

Paula Bejarano Carbo, NIESR economist, says:

“Today’s ONS data indicate that GDP fell by 0.3% in the fourth quarter of 2023, marking two quarterly consecutive falls in GDP. By the standard metric, this means that the UK economy was in a shallow recession in the second half of last year.

However, this metric is both arbitrary and not greatly informative: the state of the UK economy is better described by the fact that GDP fell between the first quarter of 2022 and the final quarter of 2023. Further, GDP per head remains lower than pre-Covid.

The broader picture of flatlining growth and its adverse implications for living standards in the long-term should dominate today’s headlines, rather than technicalities.”

Updated

“Serious government investment” in green industries, public services, housing and skills are needed to fight the recession, says Dr. Lydia Prieg, head of economics at the New Economics Foundation (NEF).

Prieg explains:

“It’s no surprise the UK fell into a recession at the end of last year. This government’s long standing failure to invest in the economy combined with the Bank of England’s panicked interest rate rises have caused serious damage.

Ordinary people are suffering the effects of these decisions, with low wages and falling standards of living likely to plague us for years. To combat this we need a drastic change in direction and serious government investment in green industries, public services, housing and skills. .”

Analysis by the UK economist for the jobs site Indeed, Jack Kennedy, makes the important point that the labour market is still not where the Bank of England thinks it should be.

Kennedy says the GDP figures showing a recession in the second half of 2023 will be a side issue for the central bank, which is much more focused on the prices that services companies are charging, which has shown no sign of decreasing by much, and the latest wage growth figures.

“Figures from the ONS was higher than expected, while data from the Indeed Wage Tracker shows that annual growth in advertised pay for new hires was running at 6.4% in January,” he said.

“Though down from last year’s peak above 7%, it’s well above equivalent measures for the euro area (3.9%) and US (3.6%).

“With labour supply constraints appearing more of an issue in the UK than elsewhere, stubborn pay pressures indicate why the Bank of England may need to maintain high rates longer than the ECB and Fed.”

Rachel Reeves has ‘rejected entirely’ the suggestion there is little difference between what Labour and the Conservatives are offering the electorate.

Asked what specifically she would do differently, compared to what’s happened over the last 18 months, Reeves cites several key parts of Labour’s plan.

  1. Reforms to planning system to get Britain building – freeing up £200bn of projects that are waiting for connection to the energy grid.

  2. A new National Wealth Fund, with a £7.3bn endowment, and GB Energy with just over £8bn, will invest in jobs and industries of the future – green steel, hudrogen, carbon capture and storage, floating offshore wind.

  3. Reforms to the apprentiship levy to help firms train the next generation of workers

  4. A modern industrial strategy

Q: How would Labour increase productivity among the economically inactive?

Rachel Reeves says this is a huge challenge, and that the UK is an outlier in failing to get people back to work after the pandemic.

Many people are on hold because they are in the record-long NHS waiting list – that needs to be tackled, she says.

Scrapping the non-dom tax status will help fund two million more NHS appointments each year to clear the backlog, Reeves adds.

Rachel Reeves has criticised Jeremy Hunt for “providing a running commentary on his own budget”.

Reeves tells reporters in London that she has never seen anything like it.

She says:

It is dangerous and it is very misguided, and I would urge him to stop this because it creates the uncertainty that we really don’t need.

Last month in Davos, the chancellor dropped a clear hint that there could be fresh tax cuts in March’s budget.

But then, at the start of this month, Hunt said he probably wouldn’t have the same scope for tax cuts as he had in last year’s autumn statement.

Q: How will you stop “Rishi’s recession” becoming “Rachel’s recession”?

Reeves insists the prime minister must own the downturn, as he’s been in charge since autumn 2022. The economy is now smaller than when Sunak became PM, she says.

And she points out that many businesses have helped Labour draw up its plans for growth.

Reeves: Don't need recession to bring down inflation

Q: Would you have been prepared to induce a recession to tackle inflation, and if not, what would you have done differently as chancellor?

Rachel Reeves says she doesn’t buy the argument that you need a recession to bring down inflation.

She points out that the UK still has the highest inflation in the G7, while its likely that the UK and Japan are the only countries that fell into recession at the end of 2023.

She tells reporters in London:

Other countries are doing an awful lot better at controlling inflation while also managing to grow their economy.

Updated

Q: What’s Labour’s plan for growth, now you have dropped the £28bn a year green energy investment plan?

Rachel Reeves says Labour’s plan for a national wealth fund and Great British Energy will drive growth in the economy, providing investment alongside the private sector.

She says it was welcome that so many businesses said last week that joint investment is needed, along with planning reforms.

Rachel Reeves then takes questions from reporters at her press conference in London.

Q: Do you recognise that today’s recession is relatively mild, compared to the pandemic and the financial crisis?

Showing her economic background, Reeves replies crisply that the definition of a recession is two consecutive quarters of negative growth.

The economy contracted by 0.1% in Q3 and by 0.3% in Q4.

These are worse numbers than economists had been predicting. This is a recession.

Reeves adds that we didn’t need these numbers to know that families are struggling through an enormous cost of living crisis, and businesses are struggling as well.

She continues:

As [businessman] Stuart Rose said on the radio this morning, if it quacks like a recession, it is a recession.

This is most certainly a recession.

Rachel Reeves says Labour’s economic plan is based on stability, investment and reform.

Stability will come from strong fiscal rules, robust economic institutions, and a fully-costed and funded manifesto, she says.

Investment will include partnerships with private sector to ‘steam ahead’ in industries of the future, and a new national wealth fund to invest alongside business in automotive sector, ports and steel. Plus Great British Energy – Labour’s plan for a new, publicly-owned clean energy company.

Reform means taking on vested interests to get Britain building again, helping working people develop skills, a genuine living wage, and cutting the NHS backlog to get people back to work.

Rachel Reeves then highlights the economic challenges facing UK families.

She points out that the average British family is 20% worse off than their German counterparts

One in three working age families have less than £1,000 in savings.

Typical family renewing their mortgage this year will pay an extra £240 each month. Three million people’s fixed-rate mortgages will end this year, and face higher borrowing costs due to the “Tory mortgage bombshell”

Rishi Sunak claims he has a plan, but the plan is not working, Rachel Reeves adds.

Taking aim at the PM, she tells reporters:

He claims that the economy has turned a corner, but the economy is shrinking.

He claims he doesn’t want to take us back to square one, but we are going backwards.

The prime minister’s claims are in tatters.

The cornerstone of his leadership has been shattered.

The promise to grow the economy has been broken.

Reeves: Britain remains trapped in a spiral of economic decline

Labour’s shadow chancellor, Rachel Reeves, is warning that Britain is trapped in a spiral of economic decline.

Giving a press conference in London now, Reeves says this morning’s drop into recession is “deeply worrying news” for families who are struggling to make ends meet, and for businesses too.

Reeves points out that today’s GDP data is provisional, and may change (the ONS regularly updates its data), but adds:

It is absolutely clear that Britain remains trapped in a spiral of economic decline.

Reeves also points out the GDP per head (a measure of living standards) fell in every quarter last year (as covered at 7.58am).

She says people didn’t need today’s GDP data to know that the economy wasn’t working. But, they “shine a spotlight” on the scale of that failure, she insists, adding:

These numbers shine a spotlight on the scale of that failure.

The confirmation of recession exposes a government and a prime minister completely out of touch with the realities on the ground.

Labour: This is Rishi’s recession

Labour are keen to pin the recession on Rishi Sunak, with a new advert contrasting the PM’s claim that the economy has “turned the corner” with this morning’s bad economic news:

EC cuts growth and inflation forecasts

Over in Brussels, the European Commission has cut its growth forecasts for this year.

The EC now expects the eurozone to only grow by 0.8% in 2024, down from an earlier forecast of 1.2%.

The wider European Union is expected to grow by 0.9%, a cut from 1.3%.

The Commission says:

After narrowly avoiding a technical recession in the second half of last year, prospects for the EU economy in the first quarter of 2024 remain weak.

However, economic activity is still expected to accelerate gradually this year. As inflation continues to abate, real wage growth and a resilient labour market should support a rebound in consumption.

This weaker growth means the EC has cut its inflation forecasts too.

Consumer price inflation, which hit 5.4% in 2023, is now expected to drop to 2.7% this year, not the 3.2% forecast in November. It is then seen slowing to 2.2% in 2025.

The EC says:

Lower-than-expected inflation outturns in recent months, lower energy commodity prices and weaker economic momentum set inflation on a steeper downward path than anticipated in the Autumn Forecast.

In the near term, however, the expiry of energy support measures across Member States and higher shipping costs following trade disruptions in the Red Sea are set to exert some upward price pressures, without derailing the process of declining inflation.

Today’s GDP report shows there was another slump in UK homebuilding at the end of last year.

Output from new construction work fell by 5.0% in the October-December quarter, including an 8% drop in private housing – the fifth quarterly drop in a row.

Repair and maintenance work grew by 4%, resulting in a 1.3% drop in overall construction output in Q4.

There’s talk this morning that the Bank of England could be pushed into raising interest rates sooner than expected, by Britain’s drop into recession.

Yesterday’s inflation report, showing prices rising slightly slower than expected, could also give the BoE some confidence to cut borrowing costs.

Joshua Mahony, chief market analyst at Scope Markets, says:

Coming hot on the heels of yesterday’s inflation report that saw both headline and core CPI move sharply lower for the month of January, we are seeing a perfect storm build that puts the Bank of England in a prime position to cut rates in the coming months.

Concerningly, we have also seen UK GDP per head continue to trend lower, with the tepid economic growth seen over recent years only coming about through an increase in the population rather than any improvement in the economy per se.

Russ Mould, investment director at AJ Bell, points out that the UK stock market was slightly higher this morning, amid recession-driven rate cut hopes.

“Confirmation that the UK is in recession has done nothing to knock UK stocks off course. An economy pushing through mud is not new news and if anything, it might encourage the Bank of England to think harder about cutting interest rates to avoid further economic deterioration.

That’s certainly how the market views the situation as UK equities ploughed ahead.”

But Craig Erlam, senior market analyst at OANDA, argues that the BoE won’t be bounced into early rate cuts by the technical recession.

The Bank of England obviously won’t be swayed by the technical recession, as Governor Bailey alluded to earlier this week, but weaker household spending may suggest demand isn’t as strong as they anticipated.

We’ll get another update on that tomorrow from the January retail sales figures.

With inflation expected to fall to target in the second quarter, maybe even further after this week’s readings, the debate around rate cuts could intensify earlier than they would have otherwise thought. Slower wage growth would obviously help that along greatly.

Charles Hepworth, investment director at GAM Investments, says Britain is now in the “slow to no growth post-Brexit” world, following its drop into recession.

He writes:

The adage of voters getting the government they deserve seems frivolous, but this is the slow to no growth post-Brexit alternate universe we find ourselves in despite prime minister Sunak’s failed pledge to grow the economy.

Today’s twin by-elections will show whether the Tories can defend their seats or whether voters really have had enough.”

Voters could point out that they haven’t had a chance to vote for Sunak at a general election yet.

The majority did, of course, plump for Brexit in 2016 – a decision which means Britain’s economy is 5% smaller than it would have been if the country had chosen to stay in the European Union, according to an analysis by Goldman Sachs this week [see Monday’s liveblog for full details].

Updated

The pound has not really been hit by the UK’s fall into recession.

Sterling is down 0.1% against the US dollar this morning, at $1.255, and a similar amount against the euro at €1.1699.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says pessimism about the UK’s prospects are weighing on the poudns.

It seems clear that national resilience in the face of higher interest rates and painful borrowing costs has finally buckled.

Even though the official recession recognition was expected, confirmation has pushed down the pound slightly, as pessimism about the UK’s prospects spreads.

UK direct debit failures jump

More bad news: the number of UK households missing their direct debit payments has jumped, as the cost of living squeeze tightens.

New data from the ONS this morning shows that the total Direct Debit failure rate rose to 1.07% in January 2024.

That is the highest level seen since the data series started in January 2019, and a 14% increase from January 2023.

A chart showing UK direct debit failures

There’s no reason to panic, yet, about the UK economy, argues Henry Cook, senior economist at Japanese financial services group MUFG.

Cook points out that the jobless rate remains low, at 3.8% in the last quarter – while consumer confidence has picked up:

All told, it was a disappointing set of GDP figures, but there’s no reason to panic just yet. For a start, the labour market remains firm with the unemployment rate stands at 3.8%, close to its historical low. Consumer confidence has also gradually improved over the last 18 months. That doesn’t scream ‘crisis’ to our minds. Meanwhile, it’s perfectly feasible that the ‘technical recession’ will be revised away in later national account updates.

The overall picture remains one of a stagnant UK economy with the monthly GDP estimate for December 2023 at exactly the same level as it was 12 months previously. The economy has essentially drifted sideways as monetary policy tightening and squeezed household finances have weighed on activity.

Updated

Full story: UK economy in recession as households cut spending

If you’re just tuning in.. we’ve learned this morning that the UK economy fell into recession at the end of last year as hard-pressed households cut back on spending in response to soaring interest rates and rising living costs.

The Office for National Statistics said gross domestic product (GDP) fell by a larger than expected 0.3% in the three months to December after a decline in all main sectors of the economy and a collapse in retail sales in the run-up to Christmas.

It followed a drop of 0.1% in the third quarter, confirming a second consecutive quarter of falling national output – the technical definition of a recession.

Official confirmation of a recession is a blow to the government with an election less than a year away and will embarrass Rishi Sunak, after the prime minister made growing the economy one of his five priorities for government at the start of last year.

More here.

The UK’s fall into a technical recession is a blow for the Prime Minister on a day when he faces the prospect of losing two by-elections, says Ruth Gregory, deputy chief UK economist at Capital Economics.

But there are also indicators that the recession is near its end, Gregory adds:

This is clearly a blow for the Prime Minister who has pledged to “grow the economy” in 2023 (whether he is referring to growth in 2023 as a whole (0.1% y/y) or in Q4 itself is not clear). But today’s release is more politically significant than it is economically.

At the margin, it might nudge the Bank of England a little closer to cutting interest rates. But we doubt the Bank will be too worried about what is likely to be a mild and short recession. Overall, today’s release does not change much.

We still think that the economy will contract by 0.1% q/q in Q1, but that a modest recovery will take hold in the second half of this year, as inflation falls, taxes are cut and the boost from lower interest rates starts to be felt.

Analysis: Even a technical recession is a headache for Rishi Sunak

The UK’s fall into a technical recession brings to an end a miserable year for the economy, our economics editor Larry Elliott writes:

Growth in 2023 as a whole was just 0.1% – the weakest performance outside the Covid pandemic year of 2020 since 2009.

In one sense, there is no comparison between 2009 and 2023. The former was a severe recession, with output declining by about 6% over a protracted period. In 2023 the economy had essentially stagnated: growing by 0.2% in the first quarter, remaining unchanged in the second quarter and then shrinking slightly in the second half of the year.

That said, even a technical recession is a headache for Rishi Sunak, who made growing the economy one of his five new-year pledges at the start of 2023. As the shadow chancellor, Rachel Reeves, was quick to point out, the prime minister has failed to deliver on that promise.

Updated

Here’s another sign that UK living standards are in decline:

Bloomberg say:

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

Updated

UK and Germany bottom of G7 growth league

The UK was the joint-worst performing G7 economy in the last quarter of 2023.

The UK’s 0.3% drop in GDP in October-December was matched only by Germany, which is on the brink of recession after a 0.3% contraction in Q4.

Japan’s economy shrank by 0.1% in the last quarter, data released overnight showed.

France stagnated in Q4, while Italy grew by 0.2%.

Across the Atlantic, Canada is estimated to have grown by 0.3% in October-December, while the US was top of the pack with growth of 0.8%.

Since the pandemic, Germany is the weakest performer, followed by the UK (although this table doesn’t include Japan’s new growth figures).

A chart showing G7 GDP
A chart showing G7 GDP Photograph: ONS

Panmure Gordon’s Simon French points out that high energy costs have hit Europe and Japan more than the US.

Updated

Starmer: Rishi Sunak has failed to turn the corner on 14 years of Tory economic decline.

Keir Starmer has warned that working people will pay the price of the recession:

Economic research institute NIESR point out that UK GDP per head remains lower than before the Covid-19 pandemic (having fallen through 2023).

Jeremy Hunt has now insisted that prioritising the fight against inflation was the “right thing to do”, after the UK slid into technical recession.

The Chancellor told broadcasters:

“We always expected growth to be weaker while we prioritised tackling inflation, that means higher interest rates, and that is the right thing to do because you can’t have long-term healthy growth with high inflation.

“But also for families when there is a cost-of-living crisis, when the cost of their weekly shop is going up, their energy bills are much higher, it is the right thing to do.

“The underlying picture here is an economy that is more resilient than most people predicted, inflation is coming down, real wages have been going up now for six months.

“If we stick to our guns, independent forecasters say that by the early summer we could start to see interest rates falling and that will be a very important relief for families with mortgages.”

The money markets expect the first rate cut to come by June.

City traders are now fully expecting three quarter-point cuts to UK interest rates this year, now the economy is in recession.

Reuters reports that UK rate futures point to about 75 basis points of cuts to Bank Rate in 2024, compared with about 70 basis points before this morning’s GDP data was released.

That means three cuts, lowering rates from 5.25% at present to 4.5% in December, are now fully priced in.

Updated

Labour have accused Jeremy Hunt of being “out of touch”, following his comments on the UK entering technical recession this morning, PA Media report.

A spokesperson for the Labour Party said:

“Jeremy Hunt’s comments are as insulting as they are out of touch.

“The Conservatives’ failure to take any responsibility for Rishi’s recession show why we need an election.”

As covered earlier (7.33am) chancellor Hunt blamed high interest rates for slowing growth, and claimed the UK economy was “turning a corner”.

Updated

IPPR: UK needs investment not "irresponsible tax cuts"

The government must prioritise public investment rather than make “irresponsible tax cuts” to held the economy, argues Pranesh Narayanan, research fellow at IPPR.

“This time last year, the Prime Minister pledged to get the economy growing but today’s data, showing a mild technical recession, shows a stark lack of progress.

“Chronic underinvestment in hospitals, schools, net zero, and infrastructure has created a crumbling public realm and a broken economy.

“This should be a wake-up call that spurs the government to prioritise public investment rather than irresponsible tax cuts. Let’s fix our problems now rather than storing them up for later.”

There are reports this morning that Jeremy Hunt is considering slashing billions of pounds from public spending plans to fund pre-election tax cuts in next month’s budget.

According to the Financial Times, the Treasury are considering reducing projected spending rises to about 0.75% a year, releasing £5bn-£6bn for Budget tax cuts.

The current plan is for real-term increases in public spending of 0.9%, which was already expected to cause “implausible austerity” – and painful cuts to spending for departments whose budgets aren’t ringfenced.

UK suffers downturn in living standards last year

The UK’s standard of living contracted all the way through 2023, today’s GDP report shows.

GDP per head – calculated by dividing the GDP of a country by its population – shrank in each of the four quarters of last year.

And it got worse through the year. GDP per head fell by 0.1% in January-March, then by 0.2% in April-June, before accelerating to a 0.4% fall in July-September and then a 0.6% drop in October-December.

A chart showing UK GDP to Q4 2023

This shows that the downturn in living standards was deeper than the headline changes to output and activity in the economy.

James Smith, research director at the Resolution Foundation, explains:

“Britain has fallen into recession, and a far deeper living standards downturn. Even this weak data is flattered by a rising population. After accounting for population growth, the UK economy hasn’t grown since early 2022, and fallen far behind its pre-cost of living crisis path, with an equivalent loss of around £1,500 per person.

“The big picture is that Britain remains a stagnation nation, and that there are precious few signs of a recovery that will get the economy out of it.”

TUC: the Tories have driven our economy into a ditch

TUC general secretary Paul Nowak says:

“The UK economy is in dire straits. After years of Tory stagnation, we are now in technical recession.

“The Conservatives’ economic failures are hitting jobs and living standards. With household budgets at breaking point, spending is down and the economy is shrinking. At the same time our crumbling public services are starved of much-needed funding.

“After being in power for 14 years, the Tories have driven our economy into a ditch and have no idea how to get out.

“It’s time for a government with a serious long-term plan and strategy for renewal, to revive our economy and sustain growth into future.”

Reeves: Rishi Sunak’s promise to grow the economy is now in tatters

This is Rishi Sunak’s recession, declares Rachel Reeves, Labour’s Shadow Chancellor.

Reeves points out that the news that the UK is now in a technical recession will be “deeply worrying” for families and businesses.

Following the news that GDP shrank by a worse-than-expected 0.3% in October-December, Reeves says:

“Rishi Sunak’s promise to grow the economy is now in tatters.

The prime minister can no longer credibly claim that his plan is working or that he has turned the corner on more than fourteen years of economic decline under the Conservatives that has left Britain worse off. This is Rishi Sunak’s recession and the news will be deeply worrying for families and business across Britain.

It is time for a change. We need an election now to give the British people the chance to vote for a changed Labour Party that has a long-term plan for more jobs, more investment and cheaper bills. Only Labour has a plan to get Britain’s future back.”

As flagged earlier, today’s GDP report shows the UK stagnated in the second quarter of 2023, before shrinking in both Q3 and Q4.

Updated

Britain’s slide into recession could put more pressure on the Bank of England to consider cutting interest rates soon, to help the economy.

Professor Costas Milas, of the University of Liverpool’s management school, says the 0.3% quarter-on-quarter drop in GDP in Q4 2023 is “absolutely shocking “, and also changes the “monetary picture” facing the BoE.

Professor Milas tells me:

The drop in GDP is even worse than the 0.1% drop I predicted recently (details here) based on the “follow the money” argument, that is, the very fact that divisia money [a measure of liquidity in the economy] has been shrinking consistently since 2023.

The Bank’s MPC (which predicted 0% growth in the February monetary policy report) cannot, and should not, ignore this shocking drop in GDP not least because it will carry over negative momentum in early 2024 and, at the same time, will accelerate the drop in inflation.

The latest figure, and the fact that the economy is in (technical) recession will definitely bring into the picture a possible interest rate cut as early as March.

Hunt: There are signs the economy is turning a corner

The UK’s fall into recession is a blow to the government, coming just as the polls opened at two byelections in Wellingborough and Kingswood.

It certainly doesn’t help the government to claim that their plan is working – a familiar refrain in recent months.

Chancellor of the Exchequer Jeremy Hunt is pinning the blame for the recession on high interest rates – which the Bank of England has raised to a 16-year high of 5.25%.

Hunt says:

“High inflation is the single biggest barrier to growth which is why halving it has been our 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 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, we must stick to the plan – cutting taxes on work and business to build a stronger economy.”

Updated

ONS: manufacturing, construction and wholesale were biggest drags on growth

Liz McKeown, the ONS director of economic statistics, says manufacturing, construction and the wholesale industry were the biggest drags on growth in the fourth quarter of 2023.

McKeown explains:

“Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.

“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.

“The latest data showed that health and education performed less well than initially estimated in both October and November. Early indications suggest they both contracted in December. Retail and wholesale were the biggest overall downwards pulls on the economy in December, partially offset by growth in computer programming and manufacturing.”

The UK economy has now failed to grow for the last three quarters.

GDP rose by 0.2% in January-March 2023 (which has been revised down from a previous estimate of 0.3%).

It then stagnated in April-June, before shrinking by 0.1% in July-September – and then this morning’s 0.3% slump in October-December.

UK GDP chart
UK GDP chart Photograph: ONS

Updated

Net trade, household spending and government consumption all contracted in the final quarter of last year, helping to push the UK economy into a technical recession.

Household expenditure fell by 0.1% in real terms (adjusted for inflation) in Q4 2023, following a downwardly revised fall of 0.9% in Q3, as consumers cut back in the cost of living squeeze.

Export volumes fell by 2.9% in October-December, following a fall of 0.8% in July-September. The fall was driven by a 6.0% decline in services exports, which offset a 0.8% increase in goods exports.

Real government consumption expenditure fell by 0.3%, due to lower activity in education and health.

The fall in health may reflect lower activity because of industrial action by NHS workers, the ONS suggests.

Marginal growth in 2023

While the economy has now decreased for two consecutive quarters, across 2023, GDP is estimated to have increased by 0.1% compared with 2022, the ONS says.

All three major parts of the UK economy contracted in October-December, today’s GDP report shows.

The services sector, which makes up around three-quarters of the economy, declined by 0.2%.

Production, which includes manufacturing, suffered a 1% drop in output, while construction shrank by 1.3%.

UK FALLS INTO TECHNICAL RECESSION

Newsflash: Britain has fallen into a technical recession.

Around a year on from Rishi Sunak’s pledge to “grow the economy”, data just released by the Office for National Statistics shows that it contracted in the final three months of 2023.

UK GDP fell by 0.3% in the October-December quarter, the ONS says, a larger fall than expected.

That follows a 0.1% drop in GDP in July-September, meaning the UK has contracted for two quarters in a row -- the standard definition of a technical recession (details here).

It’s the UK’s first recession since 2020, early in the pandemic.

In December alone, the economy shrank by 0.1%.

Just under five minutes to go, until we get the UK economy’s report card for the last quarter of 2023….

Simon French, chief economist at City firm Panmure Gordon, says the GDP reading it on a “knife edge”…

Japan slips to the world’s fourth-largest economy after falling into recession

Overnight, Japan has unexpectedly fallen into a recession after its economy shrank for two quarters in a row, new data shows.

Japan’s real GDP – the total value of goods and services – shrank by 0.1% in the last three months of 2023 compared to the previous quarter, due to weak spending by households and businesses, according to the cabinet office.

Growth for the previous quarter was also revised downward to -0.8%, meaning that Japan is in a technical recession (two quarterly falls in GDP in a row).

It has also lost its crown as the world’s third-largest economy, to Germany.

Japan’s economy, now the world’s fourth-biggest, grew 1.9% in 2023 in nominal terms – meaning it is not adjusted for inflation – but in dollar terms its gross domestic product (GDP) stood at $4.2tn compared with $4.5tn for Germany.

Yesterday, Bank of England governor Andrew Bailey said it was “in the balance” whether the UK will fall into a recession today.

Bailey told the Economic Affairs Committee in the House of Lords:

“Last year, overall GDP was basically flat... It wouldn’t take much to tip it either way, frankly.”

Kevin Boscher, chief investment officer at investment group Ravenscroft, says:

“There is a good chance of another modest quarter-to-quarter contraction in GDP data for Q4 23 leading to headlines that a “recession has begun”.”

“However, as BoE Governor Andrew Bailey has highlighted, it doesn’t makes sense to put too much weight on a “technical” 2 quarters of modestly negative growth and any recession will very likely be shallow as real disposable incomes rise and monetary policy starts to ease. “

Reeves promises “change built on the rock of fiscal responsibility and iron discipline”

Shadow chancellor Rachel Reeves is promising to put economic security first, should Labour win the next election.

In a party political broadcast released ahead of today’s GDP report, Reeves says:

“I spent my career at the Bank of England and in business before entering politics.

I know what it takes to run a successful economy. Because only by building a stronger economy can we rebuild as a stronger nation.”

Reeves is also promising “change built on the rock of fiscal responsibility and iron discipline”, a week after Labour slashed its green investment plans, and blamed the u-turn on Tory ‘recklessness’.

City economists are split over whether the UK dropped into recession or not at the end of last year.

A poll by Bloomberg found that the median of economists expect GDP to slip 0.1%. in Q4 2023, with estimates ranging from a drop of 0.2% to a gain of 0.1%.

Bloomberg explains:

“The economy has been relatively resilient, but it’s lacking in significant momentum,” said Yael Selfin, chief economist at KPMG UK. “This year is likely to be relatively uncertain because we have the elections coming up.”

The BOE is forecasting a flat fourth quarter, which would leave the UK skirting a technical recession — two consecutive periods of contraction — by the narrowest possible margin.

Introduction: GDP report to show if UK is in technical recession

Good morning.

We’re about to learn how the UK economy fared in the final three months of last year, and whether it fell into a technical recession.

The Office for National Statistics is due to report fourth-quarter GDP data at 7am this morning, as well as growth data for December alone.

City economists predict they will show the economy shrank slightly in October-December, with GDP expected to have dropped by 0.1%.

If so, that would be the second quarterly contraction in a row – as GDP fell by 0.1% in July-September, meeting the “rule-of-thumb” definition of a technical recession.

GDP fell by 0.1% in July-September, so this would be a shallow recession, as these things go, certainly compared to the plunge in activity early in the Covid-19 pandemic.

But even so, headlines declaring “Britain in recession” would surely be politically damaging, on a morning when voters in the constituencies of Wellingborough and Kingswood head to the polls in crunch by-elections.

On the other hand – if the UK avoids recession, even by a whisker, it could be a boost to the struggling Tories.

Sanjay Raja, chief UK economist at Deutsche Bank, says:

Having walked a fine line between stagnation and recession for some time, we think the UK economy will have likely slipped into a marginal technical recession in the second half of 2023 – the first since the onset of the pandemic.

Our models point to a 0.1% q-o-q contraction, driven in large part by falls in consumer spending and business investment.

As things stand, previous data has shown that monthly GDP fell by 0.3% in October, as all sectors of the economy contracted. But the economy then rallied in November, with 0.3% growth, driven by the services sector.

Economists predict a 0.2% fall in GDP in December….

The agenda

  • 7am GMT: UK GDP report for Q4 2023

  • 7am GMT: UK trade report for Q4 2023

  • 10am GMT: Eurozone trade balance for December

  • 1pm GMT: Bank of England policymaker Megan Greene holds fireside chat with Brian Coulton, chief economist at Fitch Ratings

  • 1.30pm GMT: US weekly jobless data

Updated

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