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Rishi Sunak’s pledge to “grow the economy” suffered a serious blow on Thursday as official figures showed Britain entered a technical recession at the end of 2023.
Labour claimed the prime minister’s promises on the economy were “in tatters” after gross domestic product contracted more than expected in the last three months of last year.
GDP fell 0.3 per cent in the final three months of last year compared with the previous three months, following a 0.1 per cent decline in the third quarter, according to data published by the Office for National Statistics.
Two consecutive quarters of contracting GDP is commonly defined as a technical recession.
Traders increased bets on rate cuts by the Bank of England this year. Swaps markets are pricing in three quarter point rate cuts this year, with a 75 per cent probability of the first rate cut being delivered by June, up from around 65 per cent before the GDP data was released.
Interest rate sensitive 2-year gilt yields fell 0.06 percentage points to 4.5 per cent and the FTSE 100 index of blue-chip stocks rose 0.75 per cent in anticipation of interest rate cuts. Sterling nudged down 0.2 per cent to $1.254.
Rachel Reeves, shadow chancellor, said Sunak’s promise at the start of 2023 to “grow the economy” was “now in tatters”.
She said: “The prime minister can no longer credibly claim that his plan is working or that he has turned the corner on more than 14 years of economic decline under the Conservatives that has left Britain worse off.”
But chancellor Jeremy Hunt said there were signs the British economy was “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.”
Economists polled by Reuters had forecast the economy would contract by 0.1 per cent in the final quarter as high borrowing costs, inflation and strikes hit activity.
In 2023, the economy largely stagnated as it grew only 0.1 per cent. This was well below the 2.5 per cent expansion registered in the US, and weaker than the 0.5 per cent growth of the eurozone.
The figures create a challenging backdrop for Hunt as he prepares for a March Budget. He is considering slashing billions of pounds from public spending plans to fund pre-election tax cuts in an effort to boost the Conservative party’s re-election chances.
The data comes as the Tory party risks losing two seats in by-elections on Thursday in Wellingborough, Northamptonshire and Kingswood, near Bristol.
The ONS said 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.
There was a fall in the volume of net trade, household spending and government consumption in the final quarter, only partially offset by an increase in investment.
The ONS said that in December output was down 0.1 per cent from the previous month, softer than the 0.2 per cent contraction forecast by analysts.
Earlier in the week, Andrew Bailey, BoE governor, warned against putting “too much weight” on the economy slipping into a technical recession as it expected to be “very shallow”.
“What I would put more weight on is that the indicators we have seen since then have shown some signs of upturn,” he said.
The BoE upgraded its forecast for 2024 growth, which it now says will be 0.25 per cent — up from its previous prediction of zero growth. It forecasts 0.75 per cent growth for 2025.
The GDP figures follow UK inflation data published on Wednesday which showed price growth at 4 per cent in January, the same rate as December and lower than forecast by the BoE.
However, on Tuesday, official data also revealed that pay growth was still strong, raising concerns about the persistence of underlying price pressures.
Additional reporting by Mary McDougall