Recession label ‘overly dramatic’ but UK economy in stagnation, say economists

Some experts have also suggested that conditions could be “slowly beginning to brighten” up for the economy.

Henry Saker-Clark
Thursday 15 February 2024 14:03 GMT
The UK economy entered recession in the latter half of 2023 (Victoria Jones/PA)
The UK economy entered recession in the latter half of 2023 (Victoria Jones/PA) (PA Wire)

Economists have cautioned it is “overly dramatic” to label the UK’s economic dip a recession but highlighted that latest data shows the country is currently a “stagnation nation”.

Some experts have also suggested that conditions could be “slowly beginning to brighten” in the economy despite a gloomy update on Thursday morning.

The Office for National Statistics (ONS) estimated that gross domestic product (GDP) fell by a worse-than-expected 0.3% between October and December, following a decline of 0.1% in the previous three months.

It means that the economy entered a technical recession, as defined by two or more quarters in a row of falling GDP.

It is the first time the UK has entered recession since the first half of 2020, when the initial Covid-19 lockdown sent the economy plunging into reverse, and pours cold water on the Prime Minister’s pledge to grow the economy.

However, some economists have cautioned that Brits should not focus too heavily on the recession label.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “It’s overly dramatic to label the decline in economic activity in the second half of 2023 a recession, given that employment continued to rise, real wages rebounded and measures of business and consumer confidence returned to levels consistent with rising activity by the end of the year.”

He said there was also a good chance that revisions to economic data by the ONS may see the recession avoided in the end.

Mr Tombs added: “We expect quarter-on-quarter growth in gross domestic product to average 0.3% in 2024, driven by a pick-up in households’ real expenditure.

“The (Bank of England’s) Monetary Policy Committee, therefore, needn’t panic that the economy weakened at the end of last year and can proceed with its plans to cut Bank rate only gradually this year.”

Economists currently predict that UK interest rates, which currently sit at 5.25%, will be cut to around 4.5% by the end of the year.

Experts at ING said the shallow recession is expected to only cover the last half of 2023, with the first quarter of 2024 likely to reveal a modest rebound.

Martin Beck, chief economic adviser to the EY Item Club, also said the economy should start to turn a corner in 2024.

He said: “This year should see an improvement. Recent activity surveys signalled a recovery in momentum at the start of this year, and while industrial action in the health sector will hold back a revival in activity in first quarter, the ingredients are in place for a return to growth.”

Nevertheless, other economists have said the latest GDP figures highlight broader stagnation over the past two years.

James Smith, research director at the Resolution Foundation, said: “Britain has fallen into recession, and a far deeper living standards downturn. Even this weak data is flattered by a rising population.

“After accounting for population growth, the UK economy hasn’t grown since early 2022, and fallen far behind its pre-cost-of-living crisis path, with an equivalent loss of around £1,500 per person.

“The big picture is that Britain remains a stagnation nation, and that there are precious few signs of a recovery that will get the economy out of it.”

Anna Leach, deputy chief economist at the Confederation of British Industry (CBI), added: “This brings to a close a pretty stagnant year for UK economic growth.

“Better-than-expected real earnings growth will support consumers against the headwind of higher interest rates.

“But firms remain under pressure from higher borrowing costs, higher prices, weak demand and ongoing challenges recruiting the workers they need to grow and invest.”

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