UK economy officially enters recession as GDP falls again – what it means for your money

THE economy shrank by 0.3% in the final few months of 2023, the latest figures from the Office for National Statistics (ONS) show.

It means the UK tipped into a technical recession, which is defined as two or more quarters in a row of falling Gross Domestic Product (GDP).

This is due to the economy contracting by 0.1% in December.

GDP measures the value of goods and services produced in the UK, it also estimates the size and growth of the economy.

Figures today show services output fell by 0.1% in December, and in the final three months of the year services output fell by 0.2%.

Meanwhile, production output grew by 0.6% in December, but in the three months of 2023 production output fell by 1.0%.

Today's data follows a 0.1% contraction in the previous three months, the third quarter.

Chancellor Jeremy Hunt said low economic growth is "not a surprise", and that the economy is "turning a corner".

He added that the UK must "stick to the plan – cutting taxes on work and business to build a stronger economy" despite tough times for many households.

The Chancellor said: "High inflation is the single biggest barrier to growth which is why halving it has been our top priority. While interest rates are high – so the Bank of England can bring inflation down – low growth is not a surprise.

"But there are signs the British economy is 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.

“Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy."

It's important to note that today's figures indicate what experts are calling a "mild" recession and some are expecting it to already be over.

Christopher Breen, an economist for the Centre for Economics and Business, says the downward turn may not extend beyond two quarters.

Mr Breen told BBC Breakfast: "We do think that this could be the end of the recession.

"This is a very shallow recession if you look at the previous recessions we've had."

Mr Breen added: "Everyone knows the reason why this happened, with the cost of living crisis.

"For a lot of last year people's wages haven't been keeping up - however that has changed and wages are now rising faster than prices."

Economist Samuel Tombs from Pantheon Macroeconomics said it’s "overly dramatic" to label the decline in the final two-quarters last year a recession as employment continued to rise, and real wages rebounded.

He said there was also a good chance that revisions to economic data by the ONS may see the recession was avoided in the end.

The data today could also indicate that the Bank of England may cut interest rates from the current 5.25% sooner rather than later.

ONS estimates suggest the economy did not grow at all between April and June before shrinking between July and September, which left the UK at risk of recession in the final three months.

Across the year as a whole, the economy grew, but by a slight 0.1%, down from 4.6% in 2022 and – when stripping out the pandemic-hit plunge seen in 2020 – the weakest growth since the aftermath of the financial crisis in 2009.

The ONS said the contraction was broad-based across the economy in the fourth quarter.

The contraction in the final three months of 2023 was the biggest since the first quarter of 2021, at the height of the pandemic.

The UK last went into recession in 2020 after the coronavirus pandemic hit, shutting down large parts of the economy.

The 2020 recession lasted just six months, while the previous instance in 2008 lasted one and a half years.

In a recession, job losses are common, as companies try to cut costs to stay afloat, although the effects of this one are expected to be mild.

Liz McKeown, ONS director of economic statistics, said: "Our initial estimate shows the UK economy contracted in the fourth quarter of 2023.

"While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat.

"All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth."

Most economists had been forecasting a 0.1% decline in GDP between October and December.

Experts had said that if confirmed, it would be a recession in the "mildest of senses" and is likely to be short-lived, with many preferring to describe the UK’s economy as having "stagnated".

Bank of England governor Andrew Bailey had signalled that a recession, if confirmed, would likely be brief, telling a Lords committee on Wednesday that the UK economy was beginning to pick up.

But this technical recession may further add to the case for an interest rate cut, with the Bank already indicating it's more a case of when, not if, a reduction will come.

Official data on Wednesday showed inflation defied expectations for a rise in January to unexpectedly hold firm at 4%.

This is seen as giving policymakers at the Bank more room to consider rate cuts, from the current level of 5.25%.

Nevertheless, while Mr Bailey said the latest data was "good news", he said that inflation remaining unchanged "leaves us broadly where we thought we were going to be".

What does it mean for my money?

The ONS publishes figures for the UK's GDP, which is essentially the value of all the goods and services the UK produces.

In normal times, a country's economy grows, GDP rises and average incomes tend to also go up as a result.

But sometimes the economy shrinks, GDP falls, and this is a sign that the economy isn't doing as well, and could hit people's pockets if severe.

The UK is considered to be in recession if GDP falls for two three-month periods - or quarters - in a row.

The last time the UK's economy went into recession was in 2020, at the height of the coronavirus pandemic.

It only lasted for six months, although the 20.4% fall in the UK economy between April and June 2020 was the largest on record.

The previous recession started in 2008 as a result of the global financial crisis and went on for five successive quarters.

Barret Kupelian, chief economist at PwC UK, said while the UK is in a technical recession, it would likely not be long-lasting or deep.

He said: “We expect this episode to be one of the shallowest recessions of modern times, as it does not reflect a sharp and protracted downturn in response to a specific set of adverse economic circumstances.

“Business activity picked up significantly at the beginning of the year, which should translate to better real economic data.”

How to protect your finances

There are ways you can keep your cash safe if you're worried about the UK's economic outlook.

Make sure you go through all your bank statements and accounts so you know what your income and outgoings are every month.

Of course, there are bills that you can't avoid paying - but that doesn't mean you can't cut back in other ways.

For example, you can save money by moving to a cheaper mobile phone tariff or by axing subscriptions you don't need like Netflix or Amazon Prime.

If you've got any outstanding debts, the worst thing to do is ignore them as it will only make your financial situation worse.

Stay on top of what you owe and always repay priority debts.

There are also plenty of organisations where you can seek debt advice for free.

You should also check what benefits you are eligible for as you might be able to claim without realising.

Entitledto's free calculator works out whether you qualify for various benefits, tax credits and Universal Credit.

If you don't want to register, consumer group moneysavingexpert.com and charity StepChange both have benefits tools powered by Entitledto's data that let you save your results without logging in.

There is also emergency funding available for struggling households, which is dished out by local councils.

The Household Support Fund is designed to help those on a low income or benefits cover the cost of food, energy and general living costs.

What help is available varies depending on where you live as each council sets it own eligibility criteria.

It's worth getting in touch with your local authority to see what you might be able to get.

You can find what council area you fall under by using the government's council locator tool online.

Meanwhile, The Body Shop has confirmed it has gone into administration putting 200 stores at risk of closure.

Plus, wages are still on the rise for millions of workers across the UK.

Do you have a money problem that needs sorting? Get in touch by emailing money@the-sun.co.uk.

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