At the start of last year Rishi Sunak made the promise to ‘get the economy growing’ one of his five major pledges. Today he is confronted with headlines that the UK fell into recession at the end of last year, as the Office for National Statistics reported this morning that the economy contracted by 0.3 per cent between October and December 2023. This fall in the fourth quarter followed a fall of (an unrevised) 0.1 per cent in the third quarter. That’s two consecutive quarters of negative growth – the technical definition of recession.
Today’s revelation is going to spark debate about what constitutes a recession. The technical definition has been met, but do these economic contractions fit the typical model of recession? Most notably, the labour market remains remarkably strong. We saw just this week that, far from being characterised by mass redundancies or wage stagnation, unemployment remains near historic lows, there are over 900,000 job vacancies up for grabs, and wage hikes (while slowing slightly) are comfortably outpacing inflation right now.
Meanwhile the GDP data from December shows a painful three months in the lead-up to the end of the year, but some signs of recovery in the last month. Services took a hit of 0.1 per cent, with the main driver being a drop in wholesale and retail trade. Both production output and construction output grew in December, by 0.6 per cent and 0.5 per cent respectively, but had fallen by 1 per cent and 1.3 per cent in the three months to December. The data reflects comments from Andrew Bailey, the Bank of England’s governor, yesterday, who mentioned signs of economic ‘pickup in some of the surveys’ when giving evidence to the House of Lords Committee on Economic Affairs.
The repeated insistence from government that people are becoming better off has never landed well
The broad consensus is that this recession will be short and shallow, with Capital Economics describing it this morning as ‘mild as they come’. In theory it could disappear all together. Growth figures are often revised later down the line (who could forget the major revision last year that revealed the UK economy was not still smaller than it was pre-pandemic, but had actually fully recovered back in December 2021).
A change within the margin of error could unburden the UK of its recession status. However, the provisional estimate is a bigger contraction than expected (the consensus had been for zero growth in the last quarter). A small revision upwards would still keep the UK bound within the technical definition of recession.
Britain may well already be heading out of this recession. This morning the CEBR forecasts that ‘recessionary pressure experienced in the second half of 2023 is not expected to persist into 2024’, adding that easing monetary policy this year will ‘alleviate’ much of what ‘held back growth last year’. But that does not make this any less of a political nightmare for the government, which rooted its premiership on the idea of getting the economy back on track and delivering growth.
Britain spent the whole of last year teetering on the brink of recession, falling just on the right side of the line in the first half of the year before falling on just the wrong side of the line in the second half. We can debate what constitutes a recession, but it is impossible to deny the stagnant nature of the UK economy, which has been struggling to grow since the pandemic bounce back.
The repeated insistence from government that people are becoming better off under their political programme has never landed well, because it hasn’t rung true. From both a tax and growth perspective, changes made in Whitehall have not translated to a feeling of prosperity. Despite tax cuts, the tax burden remains on track for a record high, and despite some upticks in GDP during last year, the economy is now formally in recession.
The chancellor has his work cut out for him this morning as he does the media round. Jeremy Hunt is putting emphasis on better forecasts for the start of 2024, and trying to explain that a weaker economy was the price that needed to be paid for getting the inflation rate down. He’s largely right that fast hikes in interest rates are designed to take heat out of the economy, but it raises questions about why the government was ever promising to tackle inflation and boost economic growth at the same time.
How will news of recession affect public policy? Expect far more pressure on the government to deliver substantial tax cuts in three weeks’ time, as today’s news will be viewed through the lens (in the Tory party anyway) of what happens when you squeeze the economy with high taxes. Rishi Sunak was promising more tax cuts in the Times less than a week ago. Meanwhile Jeremy Hunt has recently been trying to play down expectations, as it’s thought that his headroom to cut taxes may be smaller than hoped.
There will also be growing pressure on the Bank of England to start cutting rates. The Bank has been clear that it needs to see the inflation rate heading back to its 2 per cent target for the medium-term before it considers rate cuts – but it has also said it is keeping a close eye on how rates impact economic growth. The Bank is likely to continue to focus on its core remit, inflation, especially if indicators continue to suggest that this recession may be over just as we’ve learned it’s begun.
But the government will not have the luxury of waiting it out. The recession label is a tough one to shake, even if the circumstances are vastly different to what they have been during other recent recessions. It’s not the news they wanted heading into two by-elections this week. Far more worrying for the government, though, is that now ‘Conservatives’ and ‘recession’ are melded into the same talking point for the rest of the year.
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