Market reaction as UK falls into technical recession

The UK’s gross domestic product (GDP) fell 0.3% in the fourth quarter, more than the 0.1% drop that economists had forecast, according to latest statistics from the UK’s Office for National Statistics (ONS).

The 0.3% decline in GDP followed an unrevised 0.1% decline in the previous three months, meeting economists’ technical definition of a recession, or two consecutive quarters of contraction.


Paula Bejarano Carbo, Economist, National Institute of Economic and Social Research: “Today’s ONS data indicate that GDP fell by 0.3 per cent in the fourth quarter of 2023, marking two quarterly consecutive falls in GDP.

“By the standard metric, this means that the UK economy was in a shallow recession in the second half of last year.

“However, this metric is both arbitrary and not greatly informative: the state of the UK economy is better described by the fact that GDP fell between the first quarter of 2022 and the final quarter of 2023.

“Further, GDP per head remains lower than pre-Covid. The broader picture of flatlining growth and its adverse implications for living standards in the long-term should dominate today’s headlines, rather than technicalities.”

Kevin Brown, savings specialist at Scottish Friendly: “The Monetary Policy Committee (MPC) will have known that there was a good chance its fight against rising inflation could lead to a recession. The data released today shows that has come to pass. In fact to some degree it could be argued that this was by design.

“The purpose of increasing the base rate was to curb demand and therefore slow down those spiralling prices. Slowing certain economic activity is an inevitable by product of that process. That is working to a degree, but we are still at a delicate stage of that strategy and the tight margins the MPC is working within always made this a potential outcome.   

“The UK has been a low growth economy for some time and so there was a real risk that the medicine being administered to counter the ill effects of inflation could lead to recession. The MPC will not be too alarmed at this stage.

“However, confirmation of a recession puts growth firmly back on everyone’s agenda and places even more emphasis on what happens next with the base rate. The crucial question is when will the MPC take the pressure off the economy and many UK households by reducing the rate?

“Inflation is in retreat but not fully cured so we need to finish the course but that end date is a crucial call the MPC will have to make. Today’s data ramps up the pressure to do that sooner rather than later. 

“For borrowers and savers the picture remains mixed. If rates stay higher in the short-term inflation beating options for cash savers will stay available and many may still feel the attraction of easy access cash in times of economic uncertainty. Borrowers will continue to feel pain as the cost of borrowing stays higher than we have seen for many years.  

“For UK households considering the best home for their money over the medium to long term, now might be a good time to consider investment options. Inflation will be tamed sooner or later and the hope is that the UK economy will get back to growth.

“When rates do start to fall the good cash deals currently available will start to get fewer and farther between. That could mean investing presents a good option to keep generating returns on your money if you have a longer time horizon.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Given the monetary screws have been turned so tight, at a time when inflation has battered many people’s finances, it’s not surprising that consumers recoiled from spending, helping push the UK economy into recession.

“In December shoppers refrained from festive excesses, pulled purse strings tighter while strikes by junior doctors knocked health output. Activity on construction sites also fell back by 0.5% with downpours likely to be partly to blame.

“Although some of these may be temporary effects, and the recession is still a mild one, the contraction in the fourth quarter was worse than expected. It seems clear that national resilience in the face of higher interest rates and painful borrowing costs has finally buckled.

“Even though the official recession recognition was expected, confirmation has pushed down the pound slightly, as pessimism about the UK’s prospects spreads. Sterling was trading at $1.255, dipping 0.12%.

“There are a few green shoots of hope emerging this year, with business and consumer confidence increasing in January, but it’s going to be a hard slog back to meaningful expansion.

“This is a tough backdrop for the Conservative party to fight two by-elections, when household finances and the UK’ economic health is so high up the agenda for voters. It does raise hopes slightly though that the Bank of England will begin cutting rates from the middle of the year.”

Richard Hunter, Head of Markets at Interactive Investor: “As largely expected, the UK entered a technical recession at the end of last year, after the GDP print revealed a decline of 0.3% in the final quarter, larger than the expected 0.1% dip, and adding to the 0.1% drop from the previous quarter.

“However, the market impact was limited not only due to the better than expected inflation number yesterday, but also because some of the UK market’s recent lethargy has been based on anaemic or negative growth over recent months.

“In addition, the economy is estimated to have grown by 0.1% for the year as a whole. The indicator is also akin to driving in the rear-view mirror and as such does not indicate the current state of play. The GDP print for January is not due for release until March and the Bank of England has indicated that it expects the economy to pick up this year.

“In the meantime, the news also raises the possibility of interest rate cuts to bolster a struggling economy, although inflation including the impact of currently strong pay rises are complicating the central bank’s decision on timing, with no easing expected until June at the earliest.”

James Sproule, Chief Economist, Handelsbanken: “UK GDP for Q4 has come through at -0.3% QoQ and -0.2% YoY (Consensus -0.1% and +0.1% respectively). Month on month GDP (which is calculated differently) has come through at -0.3% (Consensus -0.2%).

“The annual figure for 2023 GDP was thus 0.3% (consensus 0.3%). There were falls in all three main sectors, -0.2% in services, -1.0% in production and -1.3% in construction. These are initial estimates and an upward revision is possible, but the conclusion has to be that the UK suffered a technical recession in the latter half of 2023.

“This is the slowest annual growth since the Global Financial Crisis of 2009 (excluding Covid ravaged 2020). The downturn was headed by falls in motor vehicle trade (consumers avoiding big ticket purchases), Information and Communications, education (strikes), rises in such areas as Admin services not proving enough to change the overall downward direction …

“Looking to the array of other data which has also been released. Business investment came out at 1.5% QoQ, 3.7% YoY, (Quarterly consensus was -0.1%), the Government’s incentivization of investment potentially helping to boost the figures here. Industrial production was 0.6% MoM, 0.6% YoY (consensus -0.1% and -0.4%) and Construction was down -3.2% in Dec and a whopping 30.2% YoY (monthly consensus -1.4%).

“Our forecast remains that we are only going to see a sustained recovery in property prices in the second half of 2024, and given recent falls in house prices (-4% peak to today), the weakness in housing starts is only to be expected. The trade picture is slowly improving, with the Goods Trade balance falling to -GBP 14.0 Bln (consensus GBP -14.9 Bln) and the non EU balance falling to GBP 2.8 Bln, the overall balance of trade now standing at GBP -2.6 Bln, a figure which stood at over GBP 10 Bln at the start of 2022 …

“Our forecast at the outset of 2023 had been for a shallow recession in the latter half of 2023, a forecast which we subsequently raised as the year progressed. The issue is that the trend rate of growth is very low and as such wavering in and out of technical “recession” has to be something of a foregone conclusion.

“The ultimate issue is that the trend rate of GDP growth has fallen to near zero, and as such minor variations and corrections in data result in technical recession (e.g. two quarters of negative growth). The fact that labour productivity for Q4, reported today, came out at -0.2% QoQ (consensus -0.2%), points to the trend rate of overall GDP growth looking set to remain anaemic.

“While the economic impact of variations in the order of 0.2% is not significant, the political point scoring in an election year is set to be considerable. Our forecast remains s that we will see a very gradual (quarterly sub 0.5%) recovery over the course of 2024, helped by slow rises to real pay, falling inflation, possible reductions in taxes in March and from mid year onwards, our expectation for a slow reduction in interest rates.”

Julian Jessop, Economics Fellow at free market think tank, the Institute of Economic Affairs: “There are plenty of excuses for the weak GDP data – many other countries have also slipped into recession, the numbers may be revised, and leading indicators are already improving. But the news is bad enough that it should have some implications for policy too.

“In particular, the Bank of England expected the economy to be flat in the fourth quarter of last year. On top of a downward revision to GDP in the first quarter, this means that the economy is already 0.4 per cent smaller than assumed in the February Monetary Policy Report.

“The MPC’s job is to worry about inflation, not growth, but the case for early rate cuts is now even stronger.

“There will also be more pressure on Jeremy Hunt to cut taxes in the Spring Budget. The Chancellor needs to be careful here. There is already some additional stimulus from the cuts in National Insurance in January and from the increases in pensions, benefits and the national minimum wage in April.

“The key driver of the slump into recession is the increase in interest rates. It is important that the Chancellor avoids doing anything that might reignite inflation and encourage the Bank to keep rates higher for longer. But there is room for some well-targeted tax cuts that would both support demand and boost the productive potential of the economy.

“Nonetheless, the UK’s problems clearly run deep, and a few tweaks to interest rates and tax rates won’t fix them. The longer-term story is that the economy is facing two decades of stagnation. There is an urgent need for the government to pursue pro-growth policies across the board.”

Marcus Brookes, chief investment officer at Quilter Investors: “The latest figures from the Office for National Statistics show that the UK economy contracted by 0.1% in December, meaning that it shrank by 0.3% in the fourth quarter of 2023. This marks the second consecutive quarter of negative growth, technically putting the UK in recession, albeit a potentially shallow and short-lived one that may not reflect the true state of the economy, which is likely to see a muted recovery in the first quarter of 2024.

“UK GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions. These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns.

“Some of these challenges are temporary and have already started to ease. The inflation rate held steady at 4% yesterday when many were predicting an increase. Over the coming months, we expect inflation to fall, potentially easing the pressure on UK households, and supporting the recovery of the consumer-driven economy. The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK’s economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the UK’s recovery. As inflation steadies and then reduces, the Bank of England is more likely to cut interest rates to stimulate economic activity and investment.

“The UK economy faces challenges and uncertainties, but it also has many strengths and opportunities. It has a dynamic economy with a skilled and flexible workforce, and the UK is expected to overcome many of the current difficulties and emerge stronger and more resilient in the future.”