UK enters recession as economy shrinks: Will the BoE cut rates sooner?

The London Eye lit up in the colors of the Ukraine to mark their Independence Day in London, Wednesday, Aug. 24, 2022.
The London Eye lit up in the colors of the Ukraine to mark their Independence Day in London, Wednesday, Aug. 24, 2022. Copyright Alastair Grant/Copyright 2022 The AP. All rights reserved
Copyright Alastair Grant/Copyright 2022 The AP. All rights reserved
By Indrabati Lahiri
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An economy is widely considered to enter a technical recession following two consecutive quarters of negative economic growth, which is usually measured by GDP.


The UK economy entered a technical recession in the fourth quarter of 2023, according to official figures from the Office for National Statistics, as UK households cut back on spending in response to soaring prices.

The quarter-on-quarter gross domestic product (GDP) report for Q4 2023 clocked in at -0.3%, worse than last quarter’s -0.1%. This was also a step down from analyst forecasts of -0.1%

The year-on-year GDP growth rate for Q4 2023 was -0.2%, also down from Q3’s 0.2% and below market expectations of 0.1%. This was the first decrease since 2021. For all of 2023, GDP only inched up 0.1%.

Although there is no official definition of a technical recession, an economy is usually believed to have entered one following two consecutive quarters of negative economic growth. Following contractions in both Q3 2023 and Q4 2023, the UK is now considered to have entered technical recession.

What is driving the fall in GDP?

The quarter-on-quarter results were mainly due to services output falling -0.2%, the same as the previous quarter. Industrial production output dropped at a faster pace, -1%, down from 0.1% in the last quarter. Construction output also saw a dip to -1.3% from 0.1%.

Exports dropped -2.9%, from -0.8%, while household spending decreased at a slower pace, clocking in at -0.1%, from -0.9%. Imports also fell at a slower pace, coming in at -0.8% in Q4 2023, from -1.8% in the last quarter.

However, gross capital formation increased 1.4% in the last quarter of 2023, from -1.4% in the previous quarter, which mainly includes structures and buildings.

What does a recession mean for the UK?

Although the UK economy has just barely fallen into recession, it is still leading to speculation of whether the Bank of England may consider cutting interest rates sooner than this summer. However, others believe that the central bank may be willing to forego short-term growth in order to bring long-term inflation firmly into control.

Matthew Ryan, head of market strategy at financial services firm Ebury, said: “The pound sold off against its peers, albeit only very modestly, with sterling remaining one of the better performing major currencies in the world so far this year.

"Clearly investors are not convinced that a mild recession will be enough to encourage the MPC to pull the trigger on lower interest rates just yet, as policymakers are far more focused on bringing down UK inflation than propping up near-term growth- continue to see the first BoE rate cut no sooner than the bank’s June meeting.”

Chief Economist of the Joseph Rowntree Foundation, Alfie Stirling, also noted that the news is concerning. 

"But it will not be front of mind for the millions already in unjustifiable hardship. Fridges are either off or empty as already eye-watering food prices continue to rise," he said.

"Loan and mortgage repayments are being missed as elevated interest rates crush family finances. And jobs are increasingly at risk as the labour market continues to deteriorate," he added.

Stirling also highlighted that it is just weeks before the Budget and said this crisis of economic security, from individual families to the nation as a whole, must be the first priority for policymakers. 

"This starts with reforming Universal Credit to reflect the actual cost of essentials, and a revitalisation of key services across care, housing and job support.

"There is no quick fix. Business investment may be the lifeblood of a growing economy, but social security and public services provide the heartbeat.,” he added.

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