U.K. Economy Shrank as 2023 Ended, Tipping Into Recession

The News

Britain’s economy sunk into a recession at the end of last year, capping off a year of economic strain in which interest rates were pushed to their highest level in a decade and a half to stamp out high inflation.

Gross domestic product contracted 0.3 percent in October to December from the previous quarter, when the economy shrank by 0.1 percent, the Office for National Statistics said on Thursday. Weak retail sales, a fall in restaurant and other food services, and a drop in housing construction all weighed on Britain’s economy, the statistics agency said.

Why It Matters: Little or no economic growth.

Britain’s prime minister, Rishi Sunak, pledged to grow the economy last year as one of five promises he wanted voters to judge him by. Instead, the economy slipped into a recession. (Two consecutive quarters of economic decline is commonly considered a recession, though other factors such as the depth of decline and job losses are also important considerations.) Overall, in 2023 the economy grew just 0.1 percent compared with 2022.

While Thursday’s data is subject to revision as more information about the economy is collected, 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 seen optimistically. Europe’s economies, including Britain, have proved more resilient than expected, averting the more dire recession warnings of early 2023.

The lackluster economy has still proven challenging for the households and businesses contending with relatively high costs and rising loan repayments. And it’s in contrast to the United States, where economic growth has surged, with the economies on either side of the Atlantic diverging as they try to put the recent bout of high inflation firmly in the past.

Other Economic Data: Inflation stuck at 4 percent in January.

Thursday’s G.D.P. report was the last in a trio of key economic data about the British economy published this week. On Tuesday, the nation’s statistics office reintroduced official estimates for unemployment and other labor market measures after a four-month hiatus because of difficulties collecting data. It showed that 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 stayed at 4 percent in January, the same as the previous month but near the lowest 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 come down?

Despite the stubbornness of inflation last month, it has slowed in Britain faster than the Bank of England had expected. And given anemic economic growth, investors are betting that interest rates will come down in the middle of the year.

Andrew Bailey, the governor of the central bank, has said he doesn’t want to keep interest rates high for longer than necessary, but policymakers are also cautious about suggesting prematurely that inflation has been defeated. In particular, the central bank is looking for wage growth to slow further.

It’s expected to be a somewhat bumpy road to sustainably return inflation back to the central bank’s target of 2 percent. The challenge was illustrated on Tuesday in the United States when inflation cooled less than economists expected and traders quickly pared back their bets on how soon rate cuts would arrive.

What’s Next: An election year.

This year is expected to be another one of low growth in Britain. The governing Conservative Party is planning to announce more tax cuts next month as part of a strategy to ignite economic growth ahead of an election that will take place this year.

But many economists argue that Britain doesn’t need tax cuts to spur the economy. They call for investment in public infrastructure and services, including schools and the health service, and reforms to the planning system to propel the green transition and get more houses built.