What is behind the UK’s fall into recession and what does it mean?

The UK fell into recession at the end of 2023 after a bigger-than-forecast contraction in the final three months.

The data from the Office for National Statistics (ONS) estimated that gross domestic product (GDP) fell by 0.3% in the fourth quarter, following a decline of 0.1% in the previous three months.

It marks the first time the UK has entered recession since the first half of 2020, when the initial Covid-19 lockdown sent the economy plunging.

(PA Graphics)

Here we look at what the implications are of the recession for the economy and the Government as it heads into a general election:

What is a recession?

A recession is defined by two or more quarters in a row of falling gross domestic product (GDP).

The UK was therefore declared in a technical recession after the ONS revealed the fall in GDP between October and December, following a 0.1% drop in the previous three months.

Why is the UK in recession?

The recession comes after households and businesses were battered by ongoing cost pressures and a lengthy run of interest rates that took Bank rate to 5.25% – the highest level since 2008.

This heaped further cost pain on millions of mortgage borrowers, with all but the most in need seeing no energy bill or cost of living support this winter from the Government.

(PA Graphics)

It has led to a spending clampdown, which has hit the housing market and consumer-facing sectors hard.

Construction firms, retailers and hospitality companies are among those that have suffered the most in recent months.

Is the economy in dire straits?

The fourth quarter contraction was worse than the 0.1% fall pencilled in by most economists and was also the biggest drop since the first three months of 2021, at the height of the pandemic.

Across the year as a whole, the economy grew, but by an anaemic 0.1%, down from 4.6% growth in 2022 and – when stripping out the pandemic-hit plunge seen in 2020 – the weakest expansion since the aftermath of the financial crisis in 2009.

But economists have been quick to point out that it is likely to be a recession in the mildest of senses and could prove short-lived.

They have said that it is more accurate to describe the economy as having “stagnated”, having limped along close to zero for much of last year.

There are also signs of resilience elsewhere in the economy, with the jobs market proving robust and wages having outstripped inflation for five months in a row.

Figures earlier this week showed the unemployment rate dropping to 3.8% in the three months to December, while inflation also held steady at 4% in January, against expectations for a rise.

What does a technical recession mean for the Government?

The figures deal a blow to Prime Minister Rishi Sunak, who has promised to grow the economy as one of his five priorities.

It could not come at a worse time for the Government, ahead of an impending general election.

Chancellor Jeremy Hunt has said inflation and higher interest rates are behind the GDP fall (PA Media)

Chancellor Jeremy Hunt has said the recession comes off the back of high inflation and the recent run of interest rate rises, but insisted the economy was now turning a corner.

Does it mean interest rate cuts are imminent?

It is likely to reinforce the case for the Bank of England to start cutting interest rates in 2024, given the threat to the wider economy from painfully high borrowing costs.

But many are unclear whether the first cut will come before the summer.

ING experts are not predicting a cut until August, while others think it could come in May or June.

Inflation is still double the Bank’s 2% target and policymakers will want to ensure it continues to head lower before bringing rates down.

What is the outlook for the economy in 2024?

Economists have stressed it is not all doom and gloom for the economy, with many predicting a return to growth in the first quarter of 2024.

And Bank boss Andrew Bailey said on Wednesday, ahead of the GDP data, that the economy was beginning to pick up.

Investec economist Ellie Henderson said: “The UK may have been in a recession at the end of last year, but the outlook for the economy is brighter across 2024.”