In the final quarter of 2023, the economy experienced its most significant downturn since 2009 (excluding the pandemic years), declining by 0.3%.
However, this fleeting recession has been followed by a period of recovery which has bolstered optimism for the near future, especially with the Bank of England (BoE) expected to lower interest rates later in the year.
Background
While experts anticipated a modest 0.1% decrease in gross domestic product (GDP) in Q4 2023 the actual decline was more pronounced at 0.3%, following a 0.1% decrease in Q3 2023.
Despite this back-to-back quarterly contraction marking a technical recession, the economy did see a slight year-on-year increase of 0.1% compared to 2022.
The economic downturn was primarily driven by declines in the services sector (0.2%), manufacturing (1%) and, most significantly, construction, which fell by 1.3% in the last quarter of 2023.
The report also detailed setbacks in 8 out of 14 service sub-sectors during the fourth quarter, including a significant 0.6% fall in retail, indicative of reduced consumer spending over the holiday season.
The construction sector stood out for its substantial 1.3% contribution to the overall GDP decline, underlining the adverse effects of rising interest rates. However, despite a 5% decrease in new projects, the sector is estimated to have grown by 2% over the year.
The automotive sector saw a decrease in sales and repairs from the third quarter, but real estate stabilised after a challenging November. Conversely, the manufacturing sector saw a reversal of its 0.1% growth in the third quarter, with declines in 10 out of 13 sub-sectors. Machinery manufacturing suffered the most, dropping by 7%, and the production of rubber and plastic products decreased by 4.7%.
Reactions and insights
Dr Roger Barker, director of policy at the Institute of Directors (IoD), said that the technical recession at the end of 2023 was a ‘psychological blow' for businesses. However, he also urged business leaders to look at the bigger picture:
"Looking at 2023 as a whole, the economy grew by 0.1%. December's figures do not make a significant difference to the big picture: the economy largely moved sideways last year. Furthermore, the current technical recession cannot be compared to the last recession in the first half of 2020, when GDP fell more than 20% in a single quarter due to the onset of the COVID-19 pandemic.
"Business leaders will now be shifting their attention to the future. Recent data from our members suggests that business confidence has been slightly improving in recent weeks."
Meanwhile, Chancellor Jeremy Hunt stressed the importance of monetary policy in boosting economic growth:
"High inflation is the single biggest barrier to growth, which is why halving it has been our top priority. While interest rates are high - so the Bank of England can bring inflation down - low growth is not a surprise.
"But there are signs the British economy is turning a corner. Forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low. Although times are still tough for many families, we must stick to the plan - cutting taxes on work and business to build a stronger economy."
Looking ahead
December 2023's retail sales plummeted to levels not seen since the January 2021 lockdowns. Despite this, experts are optimistic that this recession might be recorded as one of the shortest and shallowest.
As of late February, the Bank of England (BoE) has said that the UK is showing signs of recovery from the mild recession. BoE governer Andrew Bailey has iterated the economy will receive a boost when interest rates come down later this year. He went on to say:
"We don't need inflation to come back to target before we cut interest rates. The economy seems to be at full employment and that's a very good story."
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