What being in recession means and how it happened to the UK

Without cost actual time breaking information alerts despatched straight to your inbox signal as much as our breaking information emails

Signal as much as our free breaking information emails

Prime Minister Rishi Sunak’s pledge to develop the financial system has been dealt a hammer blow after official figures revealed Britain fell into recession on the finish of final yr.

The Workplace for Nationwide Statistics (ONS) estimated that gross home product (GDP) fell by a worse-than-expected 0.3% between October and December, following a decline of 0.1% within the earlier three months.

It implies that the financial system entered a technical recession, as outlined by two or extra quarters in a row of falling GDP.

When was the UK final in recession?

It marks the primary time the UK has entered recession for the reason that first half of 2020, when the preliminary Covid-19 lockdown despatched the financial system plunging into reverse.

Economists mentioned the recession is prone to be short-lived, with GDP anticipated to select up from the beginning of 2024.

However the figures are damning for Mr Sunak, who has vowed to develop the financial system as one in all his 5 priorities.

Shadow chancellor Rachel Reeves mentioned his financial pledge has been left “in tatters”.

She mentioned: “The Prime Minister can not credibly declare that his plan is working or that he has turned the nook on greater than 14 years of financial decline beneath the Conservatives that has left Britain worse off.

“That is Rishi Sunak’s recession and the information might be deeply worrying for households and enterprise throughout Britain.”

Chancellor Jeremy Hunt mentioned the contraction comes off the again of excessive inflation and the latest run of rate of interest rises, however insisted the financial system was turning a nook.

He mentioned it was the “proper factor to do” to prioritise tackling inflation.

The Chancellor advised broadcasters: “We at all times anticipated development to be weaker whereas we prioritised tackling inflation, which means increased rates of interest, and that’s the proper factor to do as a result of you may’t have long-term wholesome development with excessive inflation.

“The underlying image right here is an financial system that’s extra resilient than most individuals predicted, inflation is coming down, actual wages have been going up now for six months.

“If we keep on with our weapons, impartial forecasters say that by the early summer time we may begin to see rates of interest falling and that might be a vital reduction for households with mortgages.”

Why are we in recession?

The fourth quarter contraction was the largest for the reason that first three months of 2021, on the top of the pandemic.

Most economists had been forecasting a 0.1% decline in GDP between October and December.

The ONS mentioned output fell 0.1% in December after downwardly-revised development of 0.2% in November, whereas the contraction in October was additionally worse than first thought, at 0.5% towards the 0.3% fall initially estimated.

Throughout the yr as a complete, the financial system grew, however by an anaemic 0.1%, down from 4.6% development in 2022 and – when stripping out the pandemic-hit plunge seen in 2020 – the weakest growth for the reason that aftermath of the monetary disaster in 2009.

The ONS mentioned the contraction was broad-based throughout the financial system within the fourth quarter.

Liz McKeown, ONS director of financial statistics, mentioned: “All the principle sectors fell on the quarter, with manufacturing, development and wholesale being the largest drags on development.”

Retail and wholesale commerce had been the largest pull on output in December, whereas well being and training sectors additionally each contracting, in line with the ONS.

Barret Kupelian, chief economist at PwC UK, mentioned whereas the UK is in a technical recession, it might possible not be long-lasting or deep.

He mentioned: “We count on this episode to be one of many shallowest recessions of contemporary occasions, because it doesn’t replicate a pointy and protracted downturn in response to a selected set of opposed financial circumstances.

“Enterprise exercise picked up considerably at first of the yr, which ought to translate to higher actual financial information.”

However a technical recession is seen reinforcing the case for an rate of interest reduce, with the Financial institution of England already indicating it’s extra a case of when, not if, a discount will come.

What’s a recession?

There isn’t a actual definition. It’s seen as a time when the financial system is declining, however there isn’t any globally standardised means of claiming precisely how a lot decline and precisely how lengthy the interval needs to be.

Within the UK, essentially the most typically accepted definition of a recession is 2 quarters in a row when gross home product (GDP) falls.

However which means even when GDP drops by 0.01% one quarter and 0.01% once more the following we’re technically in a recession.

That may be a really shallow recession and far much less painful than if GDP shrunk by 3% one quarter and rose by 1% the following – which might not be a recession.

Different nations measure recessions in several methods, considering the scale of the drop or different elements.