A technical recession happens when gross domestic product (GDP) contracts for two consecutive quarters, as GDP fell 0.1% in the third quarter of last year.
‘More questions than answers’ as inflation remains unchanged at 4%
However, the ONS noted that, despite the two consecutive contractions, GDP is estimated to have risen by 0.1% in 2023 compared with 2022, the “weakest change in real GDP since the financial crisis in 2009”.
The 0.3% fall in Q4 was fuelled by decreases in all three main sectors: 0.2% in services, 1% in production and 1.3% in construction output, the agency said.
Similarly, there were falls in the volume of net trade, household spending and government consumption over the three-month period, which were partly offset by an increase in gross capital formation.
Between Q3 and Q4, the ONS estimated the UK economy contracted by a cumulative 0.5%; whereas, compared with Q4 2022, real GDP is estimated to have fallen by 0.2%.
However, several professionals argued the economic downturn is expected to be “short and shallow” with “brighter times” lying ahead.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said while there is an “impression of economic stagnation, brighter times surely lie ahead”, as he argued the lagged effects of high interest rates will work their way through the economy and “inflationary pressures will settle”.
This should allow the Bank of England to lower its base rate “come summertime”, he said.
UK wage growth defies forecasts but slows to lowest level in more than a year
Marcus Brookes, CIO at Quilter Investors, followed suit, arguing the technical recession should be a “shallow and short-lived one”, which may not reflect the “true state of the economy”, as it is expected to recover in the first quarter of 2024.
He added: “The inflation rate held steady at 4% yesterday when many were predicting an increase. Over the coming months, we expect inflation to fall, potentially easing the pressure on UK households, and supporting the recovery of the consumer-driven economy.
“The UK economy faces challenges and uncertainties, but it also has many strengths and opportunities. It has a dynamic economy with a skilled and flexible workforce, and the UK is expected to overcome many of the current difficulties and emerge stronger and more resilient in the future.”
Neil Birrell, CIO at Premier Miton Investors, echoed Brookes, arguing that, considering the “modest nature” of the contraction, it should not be cause of concern, despite GDP figures coming in below expectations.
“This number, on the back of better inflation data, may give rise to some concern over economic strength in the coming year. Most sectors of the economy were weak, but the optimists will point to the fact that there is plenty of scope to cut interest rates should the current trend in inflation and growth accelerate.”
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