The UK economy fell into recession at the end of last year as hard-pressed households cut back on spending amid the cost of living crisis, in a heavy blow to Rishi Sunak’s promise to kickstart growth.
The Office for National Statistics said gross domestic product (GDP) fell by a larger than expected 0.3% in the three months to December after a decline in all main sectors of the economy and collapse in retail sales in the run-up to Christmas.
It followed a drop of 0.1% in the third quarter, confirming a second consecutive quarter of falling national output – the technical definition of a recession.
Official confirmation of a recession will embarrass the prime minister before a general election expected this year, having made growing the economy one of his five flagship priorities for government.
Rachel Reeves, the shadow chancellor, said Sunak’s promise was “in tatters” after years of economic stagnation under the Conservatives. “This is Rishi Sunak’s recession, and the news will be deeply worrying for families and business across Britain,” she said.
The ONS said growth over the course of 2023 as a whole was estimated at 0.1%, the weakest year since 2009 during the financial crisis, excluding the economic collapse in 2020 during the Covid pandemic.
Highlighting a deep economic malaise as households come under pressure from soaraway prices and higher borrowing costs, official figures show economic growth per head of the population shrank for seven consecutive quarters, the worst performance since modern records began in 1955.
The director of economic statistics at the ONS, Liz McKeown, said: “Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.
“All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.”
Economists had widely expected a shallow recession at the end of last year as households came under pressure from higher borrowing costs and rising prices for everyday essentials, forcing cuts elsewhere. Widespread strikes across the economy and heavy rainfall also dampened activity.
More recent snapshots from the economy have, however, shown a rebound in consumer confidence since the start of this year, buoyed up by the prospect of interest rate cuts from the Bank of England as inflationary pressures cool.
Andrew Bailey, the Bank’s governor, this week downplayed the significance of the quarterly GDP figures, suggesting there were signs of an upturn in the economy that would become clearer in the months ahead.
The chancellor, Jeremy Hunt, said: “High inflation is the single biggest barrier to growth, which is why halving it has been our top priority. While interest rates are high – so the Bank of England can bring inflation down – low growth is not a surprise.
“But 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. Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy.”
The Bank is widely expected to begin cutting interest rates from as early as this summer amid growing concern over the strength of the economy after 14 consecutive increases in the cost of borrowing in response to soaring inflation. Official figures this week show inflation unexpectedly remained unchanged at 4% in January, having fallen back from more than 10% a year ago.
Economic growth is forecast to outpace France and Germany this year, at 0.7%, according to the Organisation for Economic Co-operation and Development, but significantly trailing the US and several other advanced economies.
The ONS said since the UK economy was about 1% larger than its pre-pandemic level, ahead of Germany, but behind every other country in the G7 group of leading developed countries.
The latest snapshot from the ONS indicated weakness across much of the economy at the end of last year, with a fall in GDP amid a tough Christmas shopping period for retailers.
Reflecting on pressure on household spending amid the cost of living crisis, the ONS said output in the UK’s dominant services sector had fallen for three consecutive quarters, with a drop of 0.2% in the last three months of 2023.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said: “Though the shallowness of this recession provides comfort, these figures also confirm that our economy remained locked in a cycle of persistent stagnation throughout 2023 as a myriad of headwinds, including high inflation, weighed heavily on activity.”
