The UK economy contracted at the end of 2023, plunging into recession

The British economy slipped into recession late last year, ending a year of economic stress in which interest rates were pushed to their highest level in around 15 years for curb high inflation.

Gross domestic product contracted by 0.3 percent between October and December compared with the previous quarter, when the economy shrank by 0.1 percent, the Office for National Statistics said on Thursday. Weak retail sales, declines in catering and other food services, and a decline in housebuilding have weighed on the British economy, the statistics agency said.

British Prime Minister Rishi Sunak pledged last year to grow the economy, one of five promises he wanted voters to judge him on. Instead, the economy sank into a recession. (Two consecutive quarters of economic decline are generally considered a recession, although other factors such as the magnitude of the decline and job losses are also important considerations.) Overall, in 2023, the economy grew by only 0.1% compared to 2022.

Although Thursday’s data is subject to revision as more information on the economy is collected, it paints a picture that Britain, like the eurozone, has seen little or no growth for much of the past year. By some measures, this weak data can be viewed with optimism. European economies, including Britain, have proven more resilient than expected, avoiding the most severe recession warnings of early 2023.

The economic gloom remains a challenge for households and businesses, facing relatively high costs and rising loan repayments. And that contrasts with the United States, where economic growth has exploded, with economies on both sides of the Atlantic diverging as they try to place the recent crisis of high inflation in the past.

Thursday’s GDP report was the latest in a trio of key economic data on the UK economy released this week. On Tuesday, the national statistics office reintroduced official estimates of unemployment and other labor market measures after a four-month hiatus due to data collection difficulties. It showed the labor market was tighter than previously thought, with an unemployment rate of 3.8 percent at the end of last year. Wage growth was around 6 percent.

Separate data on Wednesday showed the inflation rate remained at 4 percent in January, the same as the previous month but close to a two-year low. The increase in the ceiling on household energy bills has offset the slowdown in food inflation and the price of furniture and other household items.

Although inflation persisted last month, it slowed in Britain more quickly than the Bank of England had predicted. And given the anemic economic growth, investors are betting on an interest rate cut in the spring.

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 a further slowdown in wage growth.

The path to a sustainable return of inflation to the 2% target set by the central bank is expected to be somewhat strewn with pitfalls. The challenge was on display in the United States on Tuesday when inflation eased less than economists expected and traders quickly reduced their bets on how quickly rate cuts would come.

This year, Britain is expected to see weak growth again. The ruling Conservative Party plans to announce further tax cuts next month as part of a strategy to revive economic growth ahead of elections this year.

But many economists say Britain does not need tax cuts to stimulate the economy. They call for investment in infrastructure and public services, including schools and health services, as well as reforming the planning system to propel the green transition and enable more housing to be built.