GDP shrank by 0.1 per cent in December 2023, following a rise the month before, data from the Office of National Statistics has revealed.
The UK has entered recession after GDP shrank by 0.3 per cent between October and December, following a 0.1 per cent fall in the quarter before.
A recession is defined as two consecutive three-month periods where the economy contracts rather than grows.
A decline in services, production and construction output contributed to the fall, as well as a decline in volume of net trade, household spending and government consumption.
The last time the UK was in recession was in 2020 during the Covid-19 pandemic.
Although the economy has now decreased for two consecutive quarters across 2023, GDP is estimated to have increased by 0.1 per cent compared with 2022 according to the ONS.
Marcus Brookes, chief investment officer at Quilter Investors, attributed the fall in GDP to high inflation, structural weakness in the labour market, low productivity growth and adverse weather conditions.
“These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns," he said.
“Some of these challenges are temporary and have already started to ease. The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK's economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the UK’s recovery.
"As inflation steadies and then reduces, the Bank of England is more likely to cut interest rates to stimulate economic activity and investment."
Ed Monk, associate director at Fidelity International said that although there is a “fair chance” the economy will turn positive in the months ahead, there was no “real cause for celebration now”.
He said: “This news will put extra strain on households, businesses and their workers and the public finances.
"Falling growth means demand is ebbing out of the economy. That puts downward pressure on inflation but there’s little sign the Bank of England will cut rates yet. Inflation remains twice its official target level and wages are still rising strongly. That’s good for households in the short term but may mean we’re living with interest rates at these levels for many more months”
However, George Lagarias, chief economist at Mazars, remained optimistic going forward and said the recession may not be a “deep or long one”.
“We are in an election year. In the age of monetarism recessions are, ultimately, a choice. If the government steps up spending, or if the Bank of England cuts interest rates faster than presently expected, then the recession should remain short-lived.”
alina.khan@ft.com
