The United Kingdom fell into a recession while the country’s inflation remains among the highest in Western Europe.
The United Kingdom entered a technical recession as Gross Domestic Product (GDP) contracted at the end of 2023. According to the Bank of England, a recession occurs after two consecutive quarters of economic contraction.
Between October and December 2023, the UK’s economy shrank by 0.3%, following another contraction of 0.1% between July and September. For the whole year of 2023, the British economy grew by a mere 0.1%, essentially putting the country in stagnation.
The British government, however, has not declared a recession officially. The UK economy is widely expected to slightly recover in the first quarter of 2024, and declaring a recession too soon might damage markets more than necessary.
The announcement came on Wednesday evening. The FTSE index, tracking the UK’s 100 most valuable companies, fell 34.33 points on Thursday morning. The STOXX Europe 600 index, on the other hand, jumped 0.54% in intraday trading.
Last summer, the United Kingdom introduced a new system of measurement for GDP, focusing more on services output rather than manufacturing. This allowed an upward revision of post-COVID economic performances, putting the country ahead of Germany in terms of growth.
Germany, however, has yet to revise its GDP with the new method. Furthermore, even with the new system, Europe outpaced the UK in terms of growth last year.
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Why is the UK in recession?
Following the COVID-19 pandemic and the Russian invasion of Ukraine, most of the Western world was hit by a severe wave of inflation. The world’s most important central banks, including the Federal Reserve, the ECB, and the Bank of England, started raising interest rates.
Soon thereafter, however, it became clear the United Kingdom was the hardest hit by inflation. It constantly lagged behind its European peers and high consumer prices persist in the country.
The latest inflationary reading was better than expected, but the UK’s inflation remains at 4%. The BoE’s target for consumer prices is 2% year-on-year.
For this reason, the Bank of England brought interest rates to 5.25%, compared to 4% in the Eurozone. This will further delay total rate cuts by the UK: even if they start earlier than in Europe, the journey downward will be longer.
At the moment, both the BoE and the European Central Bank are considering early rate cuts. Yesterday’s confirmation of the UK economy’s dire state, as well as the better-than-expected inflation reading, may lead to the first rate cut as early as March.
