According to data from the Office for National Statistics published today (15 February), the UK fell into a technical recession at the end of 2023, after the economy shrank by 0.3% in the final three months of the year.
UK enters technical recession as economy shrinks 0.3% in Q4 2023
The overall GDP growth was the weakest change in real GDP since the financial crisis, up just 0.1% versus the previous year.
Abhi Chatterjee, chief investment strategist at Dynamic Planner, said the recession was “confirmation of the fact that high interest rates are starting to affect the entire economy”.
He said the onus for solving the UK’s stalling economic growth now fell “firmly with the incumbent government” and the Bank of England to come up with policies that help the economy grow. But he argued that a spree of reactionary rate cuts would not be a suitable long-term solution.
“While there may be general outcry for rate and tax cuts to help boost consumer expenditure and help beleaguered corporates, that could be a short-term fix,” Chatterjee said.
“What is required from our leaders are some genuine policies to be able to generate sustainable growth, which benefits the wider economy. Failing which, the image of the mammoth stuck in the La Brea Tar Pits creates the perfect analogy”.
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Charles Hepworth, investment director at GAM Investments, agreed, adding that hopes for the BoE to “hit the emergency rate cutting pedal, however, may be unwarranted”.
“The economy has likely slightly recovered from the middle of last quarter’s malaise according to recent data.”
Royal London Asset Management’s senior economist Melanie Baker said that while the shallow contraction was not too different from the flatlining economic growth recorded in previous months, the main danger was a worsening change in sentiment towards the UK as a result of the recessionary connotations.
“If people and firms are going to prominently and regularly now hear that the UK is ‘in recession’, that might affect their behaviour, for example making them more cautious to hire, spend or invest at the margin,” she said.
“Business surveys, though, are consistent with a bit of a pick-up in private sector output, with the UK composite PMI above the 50 ‘no growth’ level for three consecutive months.”
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Danni Hewson, head of financial analysis at AJ Bell, echoed these concerns, adding that even though “recession is merely nibbling at the edges of the economy and there are already signs that this slump will go down in the record books as the shortest, shallowest recession to date”, the negative sentiment impact could be significant.
“The word recession strikes a chord with all of us.
“We have lived through other downturns and felt the impact of those on our own lives, not least the post-pandemic malaise that is still gripping the country.
“We can understand that every recession is different and that the numbers this time suggest a limited impact, but we cannot help but be wary.”
She said while other economic indicators and surveys suggest some green shoots are already springing up, “the ground they are planted in is anything but fertile”.
Baker’s colleague Trevor Greetham, head of multi-asset, said one of the most striking data points to come out today was that real activity in the UK is only 1% above its 2019 Q4 level, with Brexit one of several significant domestic headwinds.
“The US economy has grown by more than 8% over the same period, underlining the case for international diversification,” he said.
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