Rishi Sunak’s promise to grow the economy ‘in tatters’ as UK enters technical recession – business live | Business

Reeves: Britain remains trapped in a spiral of economic decline

Labour: This is Rishi’s recession

EC cuts growth and inflation forecasts

Today’s GDP report shows there was another slump in UK homebuilding at the end of last year.

Output from new construction work fell by 5.0% in the October-December quarter, including an 8% drop in private housing – the fifth quarterly drop in a row.

Repair and maintenance work grew by 4%, resulting in a 1.3% drop in overall construction output in Q4.

There’s talk this morning that the Bank of England could be pushed into raising interest rates sooner than expected, by Britain’s drop into recession.

Yesterday’s inflation report, showing prices rising slightly slower than expected, could also give the BoE some confidence to cut borrowing costs.

Joshua Mahony, chief market analyst at Scope Markets, says:

Coming hot on the heels of yesterday’s inflation report that saw both headline and core CPI move sharply lower for the month of January, we are seeing a perfect storm build that puts the Bank of England in a prime position to cut rates in the coming months.

Concerningly, we have also seen UK GDP per head continue to trend lower, with the tepid economic growth seen over recent years only coming about through an increase in the population rather than any improvement in the economy per se.

Russ Mould, investment director at AJ Bell, points out that the UK stock market was slightly higher this morning, amid recession-driven rate cut hopes.

“Confirmation that the UK is in recession has done nothing to knock UK stocks off course. An economy pushing through mud is not new news and if anything, it might encourage the Bank of England to think harder about cutting interest rates to avoid further economic deterioration.

That’s certainly how the market views the situation as UK equities ploughed ahead.”

But Craig Erlam, senior market analyst at OANDA, argues that the BoE won’t be bounced into early rate cuts by the technical recession.

The Bank of England obviously won’t be swayed by the technical recession, as Governor Bailey alluded to earlier this week, but weaker household spending may suggest demand isn’t as strong as they anticipated.

We’ll get another update on that tomorrow from the January retail sales figures.

With inflation expected to fall to target in the second quarter, maybe even further after this week’s readings, the debate around rate cuts could intensify earlier than they would have otherwise thought. Slower wage growth would obviously help that along greatly.

Charles Hepworth, investment director at GAM Investments, says Britain is now in the “slow to no growth post-Brexit” world, following its drop into recession.

He writes:

The adage of voters getting the government they deserve seems frivolous, but this is the slow to no growth post-Brexit alternate universe we find ourselves in despite prime minister Sunak’s failed pledge to grow the economy.

Today’s twin by-elections will show whether the Tories can defend their seats or whether voters really have had enough.”

Voters could point out that they haven’t had a chance to vote for Sunak at a general election yet.

The majority did, of course, plump for Brexit in 2016 – a decision which means Britain’s economy is 5% smaller than it would have been if the country had chosen to stay in the European Union, according to an analysis by Goldman Sachs this week [see Monday’s liveblog for full details].

The pound has not really been hit by the UK’s fall into recession.

Sterling is down 0.1% against the US dollar this morning, at $1.255, and a similar amount against the euro at €1.1699.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says pessimism about the UK’s prospects are weighing on the poudns.

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.

UK direct debit failures jump

There’s no reason to panic, yet, about the UK economy, argues Henry Cook, senior economist at Japanese financial services group MUFG.

Cook points out that the jobless rate remains low, at 3.8% in the last quarter – while consumer confidence has picked up:

All told, it was a disappointing set of GDP figures, but there’s no reason to panic just yet. For a start, the labour market remains firm with the unemployment rate stands at 3.8%, close to its historical low. Consumer confidence has also gradually improved over the last 18 months. That doesn’t scream ‘crisis’ to our minds. Meanwhile, it’s perfectly feasible that the ‘technical recession’ will be revised away in later national account updates.

The overall picture remains one of a stagnant UK economy with the monthly GDP estimate for December 2023 at exactly the same level as it was 12 months previously. The economy has essentially drifted sideways as monetary policy tightening and squeezed household finances have weighed on activity.

Full story: UK economy in recession as households cut spending

Richard Partington

The UK’s fall into a technical recession is a blow for the Prime Minister on a day when he faces the prospect of losing two by-elections, says Ruth Gregory, deputy chief UK economist at Capital Economics.

But there are also indicators that the recession is near its end, Gregory adds:

This is clearly a blow for the Prime Minister who has pledged to “grow the economy” in 2023 (whether he is referring to growth in 2023 as a whole (0.1% y/y) or in Q4 itself is not clear). But today’s release is more politically significant than it is economically.

At the margin, it might nudge the Bank of England a little closer to cutting interest rates. But we doubt the Bank will be too worried about what is likely to be a mild and short recession. Overall, today’s release does not change much.

We still think that the economy will contract by 0.1% q/q in Q1, but that a modest recovery will take hold in the second half of this year, as inflation falls, taxes are cut and the boost from lower interest rates starts to be felt.

Analysis: Even a technical recession is a headache for Rishi Sunak

Larry Elliott

Here’s another sign that UK living standards are in decline:

Bloomberg say:

The ONS figures revealed that on a per-person basis the UK has been in recession since the second quarter of 2022, a downturn concealed only by record migration. GDP per head has shown no growth for seven consecutive quarters, the longest period since records began in 1955.

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Economic research institute NIESR point out that UK GDP per head remains lower than before the Covid-19 pandemic (having fallen through 2023).

Jeremy Hunt has now insisted that prioritising the fight against inflation was the “right thing to do”, after the UK slid into technical recession.

The Chancellor told broadcasters:

“We always expected growth to be weaker while we prioritised tackling inflation, that means higher interest rates, and that is the right thing to do because you can’t have long-term healthy growth with high inflation.

“But also for families when there is a cost-of-living crisis, when the cost of their weekly shop is going up, their energy bills are much higher, it is the right thing to do.

“The underlying picture here is an economy that is more resilient than most people predicted, inflation is coming down, real wages have been going up now for six months.

“If we stick to our guns, independent forecasters say that by the early summer we could start to see interest rates falling and that will be a very important relief for families with mortgages.”

The money markets expect the first rate cut to come by June.