2024-02-15 09:55:00
After narrowly escaping it, the British economy finally entered recession at the end of 2023. Its gross domestic product (GDP) fell by 0.3% in the fourth quarter, following having fallen by 0.1% in the third, according to figures published by the National Statistics Office this Thursday, February 15. However, two quarters of economic contraction in a row are considered by economists to be the definition of a so-called recession. « technique ».
The fact remains that, over the entire year 2023, the United Kingdom still shows slight growth. Its GDP increased by 0.1% over one year, specifies the ONS. However, this is well below the growth of 4.3% recorded in 2022. And it is also the worst performance of the British economy “since the financial crisis of 2009, except 2020”, underlines the national institute, when the country had been paralyzed for months because of the Covid-19 pandemic. In fact, it has not entered into recession since this particular year.
“With high interest rates” so that the Bank of England (BoE) can reduce inflation, “low growth is not a surprise”, commented Finance Minister Jeremy Hunt this Thursday. “But there are signs that the UK economy has turned a corner and forecasters are expecting growth for the coming years,” he assures.
Inflation: the United Kingdom, the only G7 country not to have returned to its pre-Covid-19 standard of living
However, the forecasts are not the most encouraging. The BoE expects growth of 0.25% in British GDP in 2024 and 0.75% in 2025, slightly above its November projections (at 0% in 2024 and 0.25% in 2025). The Organization for Economic Cooperation and Development (OECD) anticipates an increase of 0.7% this year and the International Monetary Fund (IMF) of 0.6%.
Inflation, evil of the British economy…
Unsurprisingly, it is inflation that is weighing down the British economy. “Inflation is the biggest obstacle to growth, which is why dividing it in two has been our priority,” Jeremy Hunt said.
The general price increase remained stable in January, at 4% year-on-year, compared to December, according to figures published this Wednesday. This is still double the BoE’s objective, which wants to reduce it to a maximum of 2%. But it has nevertheless decreased significantly compared to its peak of 11% in October 2022. Economists also expected a slight increase in January, counting on inflation at 4.2%.
And, for Paul Dales, analyst at Capital Economics, this January figure supports forecasts of a fall in inflation below the 2% target in April, which would lead to a rate cut possibly in June. The governor of the BoE appears more cautious. “We really need more evidence” a slowdown in wage growth “to demonstrate that we are on the right track to achieve inflation at 2% sustainably”, repeated Andrew Bailey on Wednesday.
…still blocks any prospect of rate cuts
Concerning a potential next reduction in the key rate, currently at 5.25%, here once more the governor is playing the caution card. In his view, inflation in services is still too high to consider reducing rates. And the unemployment figures, published this Tuesday by the ONS, indicate that real wages continued to accelerate in the last quarter of 2023, which might also encourage not lowering the key rate too quickly.
2024, the year of lower interest rates in Europe?
At its last meeting on February 1, the BoE once more opted for the status quo. The institution had raised its key rate on 14 consecutive occasions until last September. Since then, and for the fourth time in a row, she has left it unchanged. Still, at 5.25%, it is at its highest level since 2008.
A decision similar to that of the American Federal Reserve (Fed) and the European Central Bank (ECB), which have also put their monetary tightening policy on pause since last fall.
A recession to delay
Economists, however, put the extent of this recession into perspective, describing it as ” gentle “ or of “moderate”. For Samuel Tombs, economist at Pantheon Macro, it is “exaggerated” to talk regarding recession “as employment continued to rise, real wages rebounded and measures of business and consumer confidence returned to levels consistent with growth in activity at the end of the year” 2023. According to him, it would not be surprising to note, during the second estimation of the GDP figures, “that the recession has been avoided”.
“This recession is as mild as it gets and leading indicators suggest it is already nearing its end,” also nuance Ruth Gregory, of Capital Economics.
A slight recession, is it so serious?
One thing is nevertheless certain: inflation and the economy will play an important role in the legislative elections, which should be held this year in the country, but the date of which is not yet known. The opposition Labor Party currently has a clear lead in the polls over the Conservatives, who have been in power for around 14 years.
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