UK's economy in recession

And it is official, the UK’s economy is not going so well, and actually is slightly shrinking. It was anticipated, based on all the evidence that we have over the last year, but the Office for National Statistics published the latest figures of the Gross Domestic Product (GDP) for 2023 today. The data revealed that the UK’s economy has shrunk during the last 2 consecutive quarters, which is a phenomenon that economists call a recession.

GDP fell 0.3% in the final three months of 2023 compared with the previous three months, following a 0.1% decline in the third quarter. The economy has largely stagnated, as across 2023, GDP is estimated to have increased by only 0.1% compared with 2022.

Why is the economy not going so well? 

One of the main reasons is the higher costs of living. As we have mentioned in previous blogs, consumers face higher rents or mortgage repayments, increased prices of food and goods for a number of reasons, including climate change and increased fuel prices.. 

All of that has reduced the purchasing power of consumers; our economic model is focused on producing more and consuming more, so when we don’t have enough money to buy more products, or we have to prioritise more spending on essentials like housing, then the economy shrinks. 

And that happened in the last 2 quarters of 2023, with household spending contributing 0.52 percentage points to the overall reduction of GDP in the third quarter of 2023 and by 0.08 in the last quarter of 2023. The largest contributions to the fall in the latest quarter were from lower spending on recreation and culture and transport.

The lower household spending in combination with the falling government spending and reduction in the UK exports are the result of today's recession. And shows that the UK economy is heavily dependent on consumer spending for its economic stability.

The most important figure from today's statistics is the measure of GDP per capita, this is a simple estimation that divides the GDP by its total population. The GDP per person has been falling for every quarter in 2023, and overall is estimated to be reduced by 0.7% over the year. This is an indication of the falling living standards that households face in the UK and the stagnation in the economy last year.

So what does a recession mean for us ? 

Usually during a period of recession we notice higher unemployment, because of the lower confidence in the economy and the uncertainty, companies reduce their spending. That has caused people to lose their jobs as a consequence or find it difficult to get promoted or receive a pay rise. 

Depending on the government policy inequalities may increase, for example if the government decides to cut on public spending and benefits that the most vulnerable people depend on, will as a consequence increase economic and social inequalities in the community. 

Economists predict that our current recession will not last long and it is also slightly unusual as there is not any evidence that the labour market has been affected. The latest figures show that employment rose in the final three months of 2023 and unemployment fell to 3.8%. Also the wages continue to increase, while there is still a high number of vacancies.

The next couple of months will show if the business and consumer confidence will be impacted by this news. However, the current UK recession is not anticipated to have the economic impact that previous big recessions had in the recent decades, like the Great Recession of 2008 or the COVID-19 recession. Economists anticipate that the economic outlook will be brighter in 2024, however recent data have opened a political debate.