UK enters recession - amid signs interest rate hikes are starting to hit the economy

The UK economy has officially entered recession, figures show.

A recession is defined as two consecutive three-month periods where the economy contracts rather than grows.

A major measure of economic growth, gross domestic product (GDP), shrank 0.3% between October and December, the latest Office for National Statistics (ONS) data shows.

It’s a steeper fall than expected by economists who had forecast a 0.1% contraction.

It followed 0.1% of negative economic growth in the three months from July to September.

The data, however, is just an estimate and is subject to revision.

Figures are routinely revised as more information becomes available.

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While previous recessions – such as during the global financial crash of 2008 and 2009 – were long lasting this one is likely to be mild and short lived.

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It could also prompt the interest rate-setters at the Bank of England to bring down interest rates sooner and accordingly make borrowing slightly less costly as there are signs their increases are hitting the economy.

But the data will be bad news for Prime Minister Rishi Sunak and the Conservatives who made growing the economy one of the five key pledges.

Consumer spending power has been eroded by the cost of living crisis with high inflation and expensive energy bills eating into disposable income.

Stormy weather also has kept shoppers at home and limited production output.

Rainfall was far above average levels for the final three months of 2023 with higher wind speeds affecting numerous sectors of the economy including household spending and government consumption and construction, where output dropped 1.3%.

In the key December shopping month retail sales declined to a level not seen since the middle of the COVID-19 pandemic lockdown, in January 2021, the ONS said last month.

The UK economy struggled with productivity, particularly emerging from the COVID-19 pandemic. The number of long-term sick and people neither working nor seeking work hit all time highs as the virus receded and lockdowns disappeared.

Strikes too have held back productivity as private and public sector workers across industries staged walkouts throughout 2023.

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In response to the data, Chancellor Jeremy Hunt said: “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.”

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