by News
The British economy sank into recession late last year, capping a year of economic stress in which interest rates were raised to their highest level in a decade and a half to stamp out high inflation.
Gross domestic product shrank 0.3 per cent between October and December from the previous quarter, when the economy contracted 0.1 per cent, the Office for National Statistics said on Thursday. Weak retail sales, a drop in restaurants and other food services and a drop in house construction weighed on the British economy, the statistics agency said.
Why it matters: Little or no economic growth.
British Prime Minister Rishi Sunak pledged last year to grow the economy as one of five promises he wanted voters to judge him on. Instead, the economy fell into a recession. (Two consecutive quarters of economic decline are commonly considered a recession, although other factors such as the depth of the decline and job losses are also important considerations.) Overall, in 2023 the economy grew only 0.1 percent compared to 2022.
While Thursday’s data is subject to revision as more information is gathered on the economy, it paints a picture that Britain, like the eurozone, has been experiencing little or no growth for much of the past year. By some measures, this weak data can be viewed optimistically. European economies, including Britain, have proven more resilient than expected, avoiding the most severe recession warnings of early 2023.
The lackluster economy remains a challenge for households and businesses facing relatively high costs and rising loan payments. And it contrasts with the United States, where economic growth has soared, with economies on both sides of the Atlantic diverging as they try to put the recent bout of high inflation firmly behind them.
Other economic data: Inflation stagnated at 4 percent in January.
Thursday’s GDP report was the latest in a trio of key economic data on the British economy released this week. On Tuesday, the country’s statistics office reintroduced official estimates of unemployment and other labor market measures after a four-month pause due to difficulties in collecting data. It showed the labor market was tighter than previously thought, with the unemployment rate at 3.8 percent at the end of last year. Wage growth was about 6 percent.
On Wednesday, separate data showed the inflation rate remained at 4 percent in January, the same as the previous month but near the lowest level in two years. An increase in the cap on household energy bills offset a slowdown in food inflation and the price of furniture and other household goods.
Key question: When will interest rates go down?
Despite inflation’s stubbornness last month, it has slowed in Britain faster than the Bank of England expected. And given anemic economic growth, investors are betting that interest rates will fall by mid-year.
Andrew Bailey, the central bank governor, has said he does not want to keep interest rates high any longer than necessary, but policymakers are also cautious about prematurely suggesting that inflation has been defeated. In particular, the central bank expects wage growth to slow further.
The road is expected to be somewhat bumpy to sustainably return inflation to the central bank’s target of 2 percent. The challenge was illustrated Tuesday in the United States when inflation cooled less than economists expected and traders quickly reduced their bets on how soon rate cuts would come.
What’s next: an election year.
This year is expected to be another low growth year in Britain. The ruling Conservative Party plans to announce more tax cuts next month as part of a strategy to boost economic growth ahead of elections later this year.
But many economists argue that Britain does not need tax cuts to stimulate the economy. They call for investment in infrastructure and public services, including schools and health services, and reforms to the planning system to boost the green transition and build more housing.
