UK enters recession as economy shrinks - What is a recession? Will interest rates come down?

The UK entered a recession at the end of last year after a weak December for the country’s economy, official figures have shown.

The Office for National Statistics (ONS) has revealed that the UK economy contracted for the second quarter in a row in the final three months of 2023 this time by 0.3 per cent.

Economists had forecasted a 0.1% decline in gross domestic product (GDP) between October and December, following a 0.1% contraction in the previous three months, after a downward revision against the zero growth initially estimated.

A contraction in the fourth quarter means the UK has tipped into a technical recession, as defined by two or more quarters in a row of falling GDP. Experts have said that if confirmed, it would be a recession in the “mildest of senses” and is likely to be short-lived, with many preferring to describe the UK’s economy as having “stagnated”.

But the news will deal a blow to Prime Minister Rishi Sunak, who has promised to grow the economy as one of his five priorities.

The fourth quarter figures also reveal how the economy fared over 2023 as a whole.

Ellie Henderson at Investec said yesterday, before the figures were announced: “Our base case is that the economy probably did tip into a recession, although this would be in the mildest of senses: a better description of the trend might be stagnation. In all, we expect that it was a tough end to the year for the UK economy, but 2024 is likely to have got off to a better start as household budgets look to have loosened a little.

“Indeed, the decline in inflation combined with still high wage growth will continue to drive real household disposable incomes higher, a key factor behind the expected recovery this year. There will also be the added lift to post-tax incomes from the 2p cut to employees’ National Insurance Contributions, effective from January 6 – and, in all likelihood, more to come in the March Budget.”

Bank of England governor Andrew Bailey has also signalled that a recession would likely be brief, telling a Lords committee on Wednesday that the UK economy was beginning to pick up.

Mr Bailey told the House of Lords Economic Affairs Committee: “In our February Monetary Policy Report, it was in the balance – we didn’t have a recession in the forecast, but it is at best flat, in the view we took. It wouldn’t take much to tip it either way, frankly. Going forward, and I think this is in some ways more significant, we are now seeing some signs of the beginning of a pick-up in some of the surveys, for instance … we’ve got a modest pick-up this year which continues thereafter.”

Samuel Tombs at Pantheon Macroeconomics said that while he was also forecasting a 0.1% decline in the fourth quarter, the prospects were already brighter.

He added: “December’s GDP report … will create a negative first impression, but the reality is the economy is now on the up. Developments since our last forecast review at the start of January have left us more confident in our above-consensus forecast that quarter-to-quarter growth in GDP will pick up to an average rate of 0.3% this year.”

But a technical recession may further add to the case for an interest rate cut, with the Bank already indicating it is more a case of when, not if, a reduction will come. Official data on Wednesday showing inflation defied expectations for a rise in January to unexpectedly hold firm at 4% was also seen as giving policymakers at the Bank more room to consider rate cuts, from the current level of 5.25%.

Nevertheless, while Mr Bailey said the latest data was “good news”, he said that inflation remaining unchanged “leaves us broadly where we thought we were going to be”.

But he did reiterate the Bank’s view that the key question has shifted from how high interest rates have to be to bring inflation down to its 2% target, to how long they have to stay at the current level, which he said was an “important change”.

Asked by the committee whether he thought the UK could get stuck with inflation at the current level, the Bank chief reiterated that the rate is expected to return to the 2% target by the spring, according to its own forecasts.

“It looks like we’re going to have quite a leg down between now and April-May time,” he said.