Official figures released this week show the UK Gross Domestic Product (GDP) shrunk by 0.3% between October and December 2023. This followed a 0.1% contraction from July to September. These two consecutive quarters of negative growth mean that, by most accepted definitions, the UK is in recession. The economy did grow overall in 2023, but only by 0.1%, making it the second-weakest year for growth since 2009 after a pandemic-affected 2020.
Factors behind the UK falling into recession
The GDP data comes from the Office for National Statistics (ONS), which put the fall down to an unexpected drop in consumer activity in December as the cost-of-living crisis cut into most household’s Christmas spending plans.
All major areas of the economy contracted last year, with the ONS reporting that services fell by 0.2%, production by 1.0% and construction by 1.3%. The director of economic statistics at the ONS, Liz McKeown, said: “Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.
“All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery.”
Some experts have claimed that we should expect the current economic downturn to be short-lived due to a resilient jobs market and average wage growth continuing to outpace inflation. Consumers may also feel inflationary pressures easing and the prospect of lower mortgage rates loosening household budgets. On the other hand, GDP per head has fallen for a seventh-consecutive quarter, suggesting the fall in spending power for UK households is part of a longer-term decline.
Overall, it remains to be seen if the UK will pull out of a recession in the first quarter of 2024, or if this initially shallow economic dip will burrow any deeper.
How will the UK recession affect your finances?
The ONS data that tipped the UK into a recession is from the last three months of 2023, so it is already somewhat out of date. The money pressures you may have felt at the end of last year may have eased by now, or they may be worse – it ultimately depends on your financial situation. This means that the best approach is to make sure you are getting the most out of your savings and paying as little interest as possible on your credit card, loan or mortgage. If you are concerned about your investments, it is worth reading our article ‘A guide to risk and volatility in investments – what do you need to know?’.
What may affect your future spending is how the UK’s financial institutions react to a shrinking economy. In the past, the Bank of England has moved to cut interest rates to trigger economic activity and push out of recession. If this were to happen again, you could expect to earn less interest on your savings, but also pay less interest on your borrowing, including your mortgage.
The shallowness of the recession is, however, currently very different to what the UK experienced in 2007-08 and during the pandemic. Instead, the last year of economic activity could be better categorised as stagnating. This means that there are unlikely to be any drastic interventions from the Bank of England or the government.
