Official figures have confirmed the official distress of the UK economy. The latest stats that the Office for National Statistics (ONS) released reveal that the economy has shrunk in the last two quarters of 2023. This news comes as a blow to the UK government’s economic record, intensifying scrutiny on the way to the new elections.
The ONS data confirms a technical recession, which is defined by two consecutive quarters of negative growth. In fact, the final quarter of 2023 saw a 0.3% decline in GDP, which mirrors earlier estimates. This drop in economic output followed the 0.1% contraction from the previous quarter, which indicates a period of economic shrinkage.
Although the factors of this recession are pretty complex, it is inevitable that the rising inflation and the global economic uncertainty contributed significantly.
What Happens Lately in the UK Economy?
Rishi Sunak is preparing for the upcoming general elections. However, his focus is still on reassuring Tory MPs that the economy is starting to recover. This is because many business surveys showcased positive results in their activities in the private sector in the first months of this year.
Such a recovery is very optimistic for businesses, especially for startups, as the recession could definitely impact them drastically. Due to this, many businesses started cutting back on marketing and branding expenses, which included using a paid custom signature in their ads, promotions, giveaways, etc.
But let’s go a bit back. In recent months, there has been a significant fall in the inflation rate. As a result, experts believe that the Bank of England will reduce interest rates this summer, contributing to lower pressure on indebted businesses and individuals who pay mortgages.
Unfortunately, one of the Bank’s monetary policy committee (MPC), which sets the interest rates throughout the year, stated that it is a bit early for such expectations and that so far, there are no intentions for decreasing the interest rate. Due to this, people lost hope that there would be more reductions in the borrowing cost.
Jonathan Haskel, the MPC member said that even though the drop in inflation is great news, they care more about seeing persistent inflation. Once they notice this, cuts may be back in the game.
Another good news regarding inflation is that prices went up a bit slower in February than in January. More precisely, the consumer price index (CPI) fell from 4% to 3.4%. Still, the service sector continues to fight inflation of more than 5%.
While Haskel is concerned about the pace at which wages grow and threw away the optimistic expectations of lowering the interest rates, the Bank’s governor, Andrew Bailey, believes that inflation is slowly heading back to the Bank’s target of 2%. According to him, this has been a great hint of the potential interest cuts in the future.
Mixed Economic Signals
Currently, a lot of things are happening in the UK economy. Will there really be a reduction in interest rates in the upcoming period? Well, it depends on the economic trends in the market.
So far, the ONS stated that most of the decline in GDP at the end of 2023 was caused by the drop in the output of the service, production, and construction sectors. However, a more severe factor that contributed to the recession in the UK was the increase in government expenditures.
On the other hand, it seems that the lowered inflation didn’t alter the situation in trade activities. Despite the lowered CPI and prices, household spending didn’t increase. In fact, it continued to decline. Another sector that this situation has drastically affected is the retail industry.
According to the ONS, retail sales witnessed the highest monthly decrease in December since January 2021 (which was a period of rigorous COVID-19 restrictions).
Additional Thoughts on the UK’s Economic Situation
Ashley Webb is a UK economist who works at Capital Economics. Based on her experience, she believes that the UK didn’t experience a concerning recession. According to her, the recession was mild and there are indeed signs that there will be a fast economic recovery.
She also stated that their firm’s projections and forecasts for this year, as well as 2025, are stronger than those of the Bank of England. Webb revealed that their predictions include a further decrease in the inflation rate, which goes beyond the estimations of the Bank. Capital Economics also thinks that there will be a reduction in interest rates a lot earlier than what the Bank’s governor states.
Furthermore, the chancellor Rachel Reeves, criticized Rishi Sunak. He claimed that Sunak didn’t manage to properly stimulate the UK’s economic growth, which is why the recession occurred and caused a burden on the working force. She even argued that the Conservatives can’t claim success in their economic strategy after 14 long years of failure.
On the contrary, the chancellor Jeremy Hunt acknowledged the government’s efforts in this tough situation. He highlighted the great drop in inflation – from 11% to 3.4% in January, this year. Hunt also supports the consistent increase in real wages for eight months in a row.
He also reminded the public that the government’s reduction in the contributions to the national insurance will most probably return more than 900 pounds per year to the average individual’s income, which is quite a success.
