UK heads for recession as pressure mounts on Sunak

The UK economy is expected to be declared officially in recession when figures are published later this week.

Economists have told i they not only expect the economy to be in recession, but also said a much bigger worry is that its has been “more or less stagnant” for two years.

They forecast the economy contracted in the last quarter of 2023 for the second consecutive three-month period.

A recession is characterised by two consecutive quarters – three month periods – of economic contraction and they can lead to job cuts as businesses struggle.

The Office for National Statistics (ONS) will publish the October to December figures on Thursday and experts expect them to show the economy shrank by either 0.1 or 0.2 percent. In the three months from July to September the economy has already been confirmed to have contracted by 0.1 per cent.

The last time the UK saw a recession was in 2020 during the pandemic, which triggered an inflationary shock and was in part responsible for the wider cost of living crisis. Before that, the last time the UK saw a recession was in 2008 during the financial crisis. It lasted for five quarters and was the deepest UK recession since the Second World War.

The economic figures will increase pressure on Rishi Sunak, who is already facing a difficult week.

On Wednesday a rise in inflation is expected to be announced and on Thursday night or Friday morning the Kingswood and Wellingborough by-election results will be revealed – with many expecting big Conservative majorities to be overturned or at least severely depleted.

Some right-wing Conservatives are so concerned that they are considering an attempt to replace Mr Sunak as Conservative leader if the Reform Party perform well at the expense of Tory votes. While replacing him before a General Election is considered unlikely, plotters could be galvanised into giving damaging briefings against him as they seek a replacement.

Poor economic figures are likely to leave him facing renewed demands from backbenchers for tax cuts to stimulate growth, while any by-election defeat will increase unrest among Conservative PMs.

Several forecasters told i it is likely that a recession will be confirmed on Thursday – albeit a marginal one.

What do economists predict?

Capital Economics said it thought that the gross domestic product (GDP) fell by 0.3 per cent in November and December, which would mean that the economy contracted by 0.1 per cent in the final quarter of last year, as it did in the three months prior.

The National Institute of Economic and Social Research (NIESR) added it expected a 0.1 per cent contraction, which it said “means that the United Kingdom was in a technical recession in the second half of last year”.

Meanwhile, Oxford Economics predicts there will be a 0.2 per cent contraction for the last quarter of last year, while Deutsche Bank Research said its “baseline expectation” was that the economy entered into a “marginal technical recession to end 2023”.

What does a recession mean for interest rates?

The GDP figures feed into the Bank of England’s decision on what it will do with interest rates. The base rate has been kept at 5.25 per cent four consecutive times as the Bank struggles to keep down sticky inflation.

A recession would put more pressure on the Bank to cut rates. During a recession, interest rates usually fall because the Bank needs to stimulate the economy by making it easier to borrow money and access credit, which in turn should encourage more spending.

As the cost of borrowing is reduced, banks could also lower their own interest rates, which means mortgage rates should go down, making getting a mortgage – or remortgaging – more affordable.

However, as there is likely only a small contraction, large changes to interest rates and mortgage rates is unlikely.

Inflation figures due to be revealed this Wednesday will also have an impact on interest rates. They are expected to show a small increase to 4.2 per cent in January, up from 4 per cent in December.

What could a recession mean for Britons’ finances in 2024?

Experts said that in reality, whether or not the UK technically enters recession will not matter hugely, because the alternative is very minimal growth.

Generally, minimal positive and negative growth have similar outcomes. They signal lower spending, which generally means that businesses struggle more, either limiting growth or scaling back, resulting in higher unemployment, a greater risk of job cuts, and lower capacity for pay rises.

This then leads to lower living standards generally than if economic growth is higher, because it broadly leads to people having less money in their pockets.

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Stephen Millard, deputy director at NIESR, told i: “Whether growth was slightly positive or slightly negative in the final quarter of 2023 is not really the point. The big picture is that the UK economy has been more or less stagnant for the past two years.

“Addressing this problem of very low growth will need to be the priority for whichever party forms the next government.”

He said that for 2024, people could expect growth to pick up a little, but that it would likely remain “sluggish”.

“The unemployment rate will be gently rising over the same period,” he added.

Michael Saunders, a former member of the Bank of England’s Monetary Policy Committee (MPC) and now senior adviser at Oxford Economics, said “the big issue” was “the long stagnation in UK living standards, rather than whether the last quarter was slightly down or not”.

He said: “In July to September last year, real GDP per head in the UK was only 3.7 per cent up from the third quarter of 2016, well behind the euro area.”

“Even Italy – which we used to view as a laggard – has seen real GDP per head rise 7.8 per cent over the same period,” he added.

Others were more positive. Ashley Webb, an economist at Capital Economics, said: “The good news is that any recession will be tiny and may already be nearing an end. We think the economy will recover over the coming quarters as the drag from high inflation and high interest rates fades.”

Recessions often follow periods of high interest rates because high rates mean borrowing is more expensive.

This means spending decreases because people have less disposable income, which can cut or curtail the expansion of businesses. Interest rates could fall from their current level of 5.25 per cent later this year, which may ease some of that pressure.

Mr Webb said that unemployment would likely still grow a little in the coming months, reaching its highest level between April and June.

“We suspect the unemployment rate may rise gradually from 4.1 per cent in the third quarter of 2023, perhaps to a peak of 4.3 per cent in the second quarter of this year,” he said.