By Joshua Kirby
The U.K. followed Japan into recession at the end of last year, contrasting with a buoyant U.S. economy and leaving the Bank of England with a tough call as it decides when to start easing monetary policy.
Gross domestic product contracted by 0.3% between October and December, Office for National Statistics figures showed Thursday, a sharper decline than expected by economists polled by The Wall Street Journal. Following a contraction of 0.1% in the previous three-month period, the dip means the country entered recession, defined generally as two successive quarters of falling output.
On an annualized basis, the economy contracted by 1.4%, differing sharply from the more than 3% growth in the U.S. economy over the same period. This marks the second of the major G-7 economies to fall into recession after Japan on Wednesday reported an unexpected contraction at the end of 2023 amid sluggish domestic spending. The 20-member euro bloc meanwhile narrowly avoided a recession over the same period.
Consumer spending, the main driver of the U.K. economy, fell 1% over the second half of 2023, with retail spending proving stubbornly sluggish amid a prolonged cost-of-living crisis.
The U.K. should nevertheless prove able to quickly pull itself out of the slump, said Suren Thiru, economics director at professional group the Institute of Chartered Accountants in England and Wales.
"The unwanted tag of being in recession owes more to temporary factors, including strike action, than the wider economic pain you typically associate with technical downturns," Thiru said in a release.
While the recession is shallow and unlikely to last long into 2024, the downturn could provoke renewed calls for the Bank of England to give the economy some breathing space through an easing of interest rates.
The key Bank Rate currently stands at 5.25%, its highest level since the 2008 financial crisis, after the BOE at the end of 2021 began to lift its key deposit rate from its then lows in a two-year cycle of successive hikes. In doing so, it aimed to rein in rampant price inflation triggered by global supply snarls and the recovery from the pandemic, and later greatly exacerbated by Russia's full-scale invasion of Ukraine in early 2022, which sent energy prices soaring.
But inflation has now largely cooled in the U.K., standing steady at 4.0% at the beginning of the year, and looks set to fall further; some economists expect price rises to dip below the BOE's 2% target as early as April. This would provide scope for the bank to begin cutting rates and bolster the ailing economy through an easing of money supply.
As inflation stabilizes and eases, the BOE will be ever more likely to cut rates, said Marcus Brookes, chief investment officer at Quilter Investors.
"The key indicator to watch is inflation in the services sector, which... reflects the strength of wage growth and consumer demand, which are crucial for the U.K.'s recovery," Brookes said in a note.
Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
(END) Dow Jones Newswires
02-15-24 0259ET
