The UK avoided a recession last year by the narrowest of margins after the cost-of-living crisis and industrial action hit the economy during December.
(Bloomberg) — The UK avoided a recession last year by the narrowest of margins after the cost-of-living crisis and industrial action hit the economy during December.
Gross domestic product was unchanged in the fourth quarter following a revised 0.2% decline in the previous three months, the Office for National Statistics said Friday. Output in December alone fell 0.5%.
The figures meant that Britain dodged back-to-back quarterly contractions — the definition of a technical recession. The economy nonetheless was 0.8% smaller than its size at the end of 2019, making the UK the only Group of Seven country that has yet to fully recover output lost during the pandemic.
“The UK economy ended 2022 on a slightly more positive note, narrowly avoiding a technical recession, but it is still expected to fall into a mild yet prolonged recession throughout this year,” said Yael Selfin, chief economist at KPMG UK. The December figures are “pointing to the continued fragility of the UK economy.”
GDP figures are subject to revisions, leaving open the risk that Britain was in fact in recession. The ONS will make another estimate at the end of March. The weakness of consumer spending following a cost-of-living crisis along with strikes and even the impact of extra holidays and timing of football matches pose risks to the economy.
As they stand, the GDP figures have implications both for the Bank of England’s monetary tightening and the Treasury’s planning for the budget on March 15.
“The bank may need to raise interest rates a little further to squeeze out inflation,” said Kitty Ussher, chief economist at the Institute of Directors. “The government may find it has higher tax revenues at its disposal when it considers its options for the budget.”
What Bloomberg Economics Says …
“A downturn over the first half of this year still looks likely, as higher interest rates and a cooling labor market crimp activity. The good news is that we expect the recession to be shallow by historical standards. The bad is that there’s little prospect of a meaningful pick-up in growth further out.”
—Ana Andrade, Bloomberg Economics. Click for the REACT.
Chancellor of the Exchequer Jeremy Hunt welcomed the figures but noted the government needs to bear down on inflation, which reached a 41-year high last year.
“Our economy is more resilient than many feared,” Hunt said in a statement. “However, we are not out the woods yet, particularly when it comes to inflation.”
Ussher said the headline figures masked some better signs. She said the weakness was in public-sector activity, notably health and education, and the postponement of usual sporting fixtures.
“If it were not for those factors, the economy would have grown on the quarter,” she said.
In a sign of inflation that will concern the Bank of England, the total bill for wages and salaries in 2022 was up 7.4%, the biggest increase since 1999.
Household spending rose 0.1% in the fourth quarter, suggesting consumers are weathering the worst cost-of-living crisis in generations. World Cup football matches led to a 17% fall in sports activity in December as the UK’s domestic Premier League halted games until the end of the month.
Business investment jumped 4.8% in the final three months of 2022, putting it back at a level not seen since before the pandemic. That’s a sign that companies are increasing spending despite concerns about the economic outlook.
For the whole of 2022, the UK economy grew 4%. That’s slower than the 7.6% pace recorded in 2021 when the nation was recovering from pandemic lockdowns.
Output in manufacturing and construction stalled in December. Overall industrial production rose 0.3%, due to cold weather boosting utility output.
The dominant services industry shrank by 0.8% in December, more than twice the pace expected. Consumer-facing services dropped 1.2%.
That reflected poor retail sales during the month and an escalation of strikes, as hundreds of thousands of workers from nurses to train drivers walked off the job seeking better pay.
The ONS said it couldn’t estimate the exact impact of strikes but that they curtailed output across a wide range of industries.
“The British economy is stagnating, and it will be the living standards of ordinary families that suffer,” said George Dibb, head of the center for economic justice at the Institute for Public Policy Research. “The government is merely tinkering around the edges, but unless the root of the problem is fixed, we are unlikely to see meaningful growth anytime soon.”
More than 1.6 million working days had already been lost to labor disputes in the six months through November, putting 2022 on course to be the worst year for industrial action since the late 1980s. Capital Economics estimates as many as 1.5 million more were lost in December.
Strikes by rail and postal workers hit the rail transport and postal industries. Heath and social work activity shrank 2.8% in December, partly because of the impact of NHS strikes. The ONS said the various sectors were affected by rail and postal strikes, from hospitality to flower sellers.
The recession is now thought to have started in the first quarter, with the Bank of England predicting a shallow downturn extending into early 2024.
The outlook is less bleak than it appeared a few months ago, thanks to tumbling natural gas and electricity prices and calm returning to markets with a more orthodox fiscal policy.
“Although we’re not forecasting a recession as such, life is certainly not going to be great for a large number of households,” Stephen Miller, deputy director of the National Institute of Economic and Social Research, said on Bloomberg Radio. “We’re not expecting the economy to grow that much at all.”
Read more:
- Why Strike-Averse Britain Is Gripped by Labor Unrest: QuickTake
–With assistance from Joel Rinneby and Christopher Pitt.
(Updates with comment and details on wages and investment from fifth paragraph.)
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