U.K. Economy Enters Technical Recession, Facing Headwinds from High Inflation and Sector Contractions

The United Kingdom has officially slipped into a technical recession, as initial figures from the Office for National Statistics (ONS) revealed a 0.3% contraction in the country's gross domestic product (GDP) during the final quarter of last year. This marks the second consecutive quarterly decline, meeting the widely accepted definition of a technical recession.

Economists polled by Reuters had anticipated a slightly less severe downturn, with a consensus forecast of -0.1% for October to December. All three major sectors of the economy experienced contractions in the fourth quarter, including a 0.2% decline in services, a 1% dip in production, and a notable 1.3% reduction in construction output.

For 2023, the British GDP is estimated to have increased by a mere 0.1%, a stark contrast to the previous year. In December alone, economic output shrank by 0.1%. The decline in GDP per capita, adjusting for population growth, further emphasises the economic challenges, contracting by 0.6% in Q4 and 0.7% throughout 2023.

High inflation remains a significant obstacle to economic growth, according to U.K. Finance Minister Jeremy Hunt, who identified it as "the single biggest barrier to growth." The Bank of England's commitment to maintaining firm interest rates to counter inflation contributes to the economic slowdown.

Hunt, however, expressed optimism about the future, stating, "There are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down, and unemployment remains low."

Inflation has moderated in the U.K., but it continues to exceed the Bank of England's 2% target, registering a headline consumer price index reading of 4% year-on-year in January.

Analysts, including Marcus Brookes, Chief Investment Officer at Quilter Investors, suggested that the recession might be "shallow and short-lived," attributing it to persistently high inflation, labour market weaknesses, low productivity growth, and adverse weather conditions. Brookes highlighted that some hindrances are temporary and already starting to ease, especially with the inflation print in January falling below forecasts.

Chief Investment Officer at Premier Miton Investors, Neil Birrell, acknowledged that Thursday's figures and the softer-than-expected inflation data could raise concerns about economic strength in the coming year. However, he pointed out that there is room for optimism, as there is "plenty of scope to cut interest rates should the current trend in inflation and growth accelerate." Despite the challenges, analysts expect a muted recovery throughout 2024.