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The United Kingdom has entered a mild recession in the latter half of 2023, indicating that Prime Minister Rishi Sunak has yet to fulfill his promise of economic growth.
According to figures released by the Office for National Statistics on Thursday, Gross Domestic Product (GDP) fell by 0.3% in the fourth quarter, surpassing economists’ forecast of a 0.1% decline. This follows a previously unrevised 0.1% drop in the preceding three months, meeting the technical definition of a recession — two consecutive quarters of contraction.
Although the UK economy still saw a 0.1% expansion over the entire year, it marked the slowest annual growth since 2009, excluding the initial year of the pandemic. The last time the UK economy experienced a quarter of growth was in the first three months of the previous year.
UK bonds experienced a second consecutive day of gains, with 10-year yields retracting from a two-month high near 4.2% to dip below 4% for the first time in a week. Monetary policy easing expectations surged in money markets, fully pricing in three quarter-point cuts and assigning a 10% probability to a fourth cut, with the first reduction anticipated by August.
Meanwhile, the pound declined by as much as 0.2% against the dollar, reaching $1.2542, poised for a third consecutive day of losses.
The recession, while widely anticipated, underscores the toll taken by the Bank of England’s efforts to curb inflation. The timing of these figures is particularly unfavorable for Sunak, as voters cast their ballots in two parliamentary constituencies in England, testing the Labour Party’s strength ahead of an anticipated general election later in the year.
Upon assuming office in October 2022, Sunak outlined growing the economy as one of his five key pledges, alongside reducing debt, halving inflation, decreasing health services waiting lists, and stemming boat migration across the English Channel. Currently, he can only claim success in slowing down price growth, an area where the bank holds greater influence than the government.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, commented, “The news that the UK slipped into technical recession in 2023 will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections.” However, Gregory also noted that this recession is mild, and early indicators suggest it may already be nearing an end.
Despite the milestone, pressure may mount on the Bank of England to expedite rate cuts, as investors anticipate reductions to commence by August. BOE Governor Andrew Bailey downplayed the significance of a technical recession earlier this week, citing indications of an “upturn” in surveys covering the beginning of 2024, though the bank had initially expected the economy to evade contraction in the fourth quarter.
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