Skyline view of the City of London financial district.
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LONDON – The UK economy fell into a technical recession in the final quarter of last year, initial data showed on Thursday.
The Office for National Statistics said Britain’s gross domestic product shrank 0.3% in the final three months of the year, marking a second consecutive quarterly decline.
Although no official definition of recessionTwo consecutive quarters of negative growth are widely considered a technical recession.
Economists polled by Reuters gave a consensus forecast of -0.1% for the October-December period.
All three main sectors of the economy contracted in the fourth quarter, with the ONS noting declines of 0.2% in services, 1% in manufacturing and 1.3% in construction.
For the whole of 2023, UK GDP is estimated to have increased by just 0.1% compared to 2022. In December, production fell by 0.1%.
UK Chancellor Jeremy Hunt said high inflation remains the “biggest headwind to growth” as it forces the Bank of England to maintain firm interest rates and drags on economic growth.
“But there are signs that the UK economy is turning the corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are falling and unemployment remains low,” he added. .
Inflation in the UK has fallen markedly but remains well above other economies in the country and the Bank of England’s 2% target, which is squeezing household finances. The consumer price index in January was 4% year on year.
Notably, GDP per capita, which adjusts for population growth, contracted 0.6% in the fourth quarter after declining 0.4% in the previous three months and continued to decline in each quarter of last year. For all of 2023, seasonally adjusted GDP per capita contracted by 0.7%.
“Shallow and short-lived” recession
Marcus Brooks, chief investment officer at Quilter Investors, said the figures likely indicate the recession will be “potentially shallow and short-lived, which may not reflect the true state of the economy”, which should experience a “muted recovery” through 2024 .
“The contraction in UK GDP in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labor market and weak productivity growth, as well as adverse weather conditions,” Brooks said in an email.
“These factors have impacted the performance of the services and construction sectors, which are the main drivers of the UK economy.”
He noted that some of these headwinds are temporary and have already begun to ease as January inflation fell short of forecasts for a renewed acceleration.
“We expect inflation to ease in the coming months, potentially easing pressure on UK households and supporting the recovery of the consumer-led economy,” Brooks added.
“The key indicator to watch is inflation in the services sector, which accounts for the bulk of UK economic activity and employment and reflects the strength of wage growth and consumer demand that are critical to the UK’s recovery.”
Neil Birrell, investment director at Premier Miton Investors, said Thursday’s data and softer-than-expected inflation data “could raise some concerns about economic growth next year.”
“Most sectors of the economy have been weak, but optimists will point to the fact that there is plenty of room for interest rates to be cut if the current trend of inflation and growth accelerates.”