UK falls into recession as economy stagnates with shrinking GDP

The UK economy fell into a recession at the end of 2023, according to the latest data from the Office for National Statistics (ONS) on Thursday.

Gross domestic product (GDP) for October to December dropped to 0.3%, which was a sharper decline than economists were expecting, and the second quarterly fall in a row.

The economy was pushed into reverse thanks to higher inflation and interest rates hitting consumers' spending. However, all major sectors contracted during the period.

It comes after a decrease of 0.1% in the previous quarter, between July and September 2023. A technical recession is defined as two consecutive falls in GDP.

Across the whole year, in 2023 GDP was estimated to have increased by 0.1% compared with 2022, while on a monthly basis, Britain ended the year with a 0.1% decline in December.

“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," said Liz McKewown, ONS director of economic statistics.

“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,"

She added: "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."

Read more: What is a technical recession and what does it mean for me?

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

It also suggests that the Bank of England (BoE) may delay cutting UK interest rates until the summer.

On the back of the news, money markets have increased their bets of an interest rate cut from Threadneedle Street, pricing in around 78 basis points of cuts this year. This is equivalent to more than three quarter of a point rate cuts, compared with about 70 bps before the ONS figures.

After the release, chancellor Jeremy Hunt pinned recession blame on high interest rates, which currently stand at a 16-year high of 5.25%.

GDP is estimated to have fallen in October to December (Quarter 4):

▪️ services fell (-0.2%)
▪️ construction fell (-1.3%)
▪️ production fell (-1.0%)

➡️ https://t.co/gsheUbREuI pic.twitter.com/r7xi4Eokhu

— Office for National Statistics (ONS) (@ONS) February 15, 2024

He said: “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.”

Read more: Bread, meat and biscuits get cheaper as UK food inflation drops

The ONS also revealed that the UK’s standard of living contracted all the way through 2023.

While the economy stagnated, families experienced a deeper living standards downturn, with GDP per capita now 4.2% off its pre-cost of living crisis path — equivalent to a loss of nearly £1,500 per household, according to the Resolution Foundation.

James Smith, research director at the Resolution Foundation, said: “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.”

Watch: What is a recession and how do we spot one?

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