UK GDP shrank by 0.3% in the fourth quarter of 2023, figures from the Office for National Statistics show, plunging the UK into a technical recession. It is the second quarter in a row of GDP contraction, after a 0.1% downturn in the third quarter of last year.
Marcus Brookes, chief investment officer at Quilter Investors, said: “UK GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions.
“These factors affected the performance of the services and construction sectors, which are the main drivers of the UK economy. Retail sales also declined sharply in December, in the face of ongoing high inflation and interest rates as well as changing buying patterns.”
However, employment continued to rise, real wages rebounded and measures of business and consumer confidence moved back to levels consistent with rising activity by the end of the year, indicating that this recession might be a shallow one.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, added: “The upward bias in revisions to GDP suggests that we might eventually look back at this period to find that a recession was avoided.
“Indeed, the estimate of quarter-on-quarter growth in GDP has been revised up between the first and second estimates by 0.11pp on average over the last five years.”
As a result, Tomasz Wieladek, chief European economist at T. Rowe Price, is optimistic on the outlook for the UK economy.
He stressed the resilience of the labour market and noted improvements in the data in December and January.
Wieladek suggested the UK economy might even return to growth in the first half of 2024, without a significant rise in unemployment.
He added: “Although the Monetary Policy Committee will take this morning’s contraction into account, as long the labour market remains resilient, the debate about whether and when to cut will continue and the timing of the first rate cut will remain highly uncertain.
“We believe the most likely time for a rate cut is in H2 2024, but the contraction this morning raises the risks of an earlier cut.”
However, Danni Hewson, head of financial analysis at AJ Bell, is more wary and warned that this technical recession could knock business and consumer confidence, which is already shaky.
He said: “The UK economy has been boggy for the last couple of years and all sectors have struggled to find their feet. The big question now is how will these figures play into the Bank of England’s determination of when interest rates should start to come down?
“With construction seeing the biggest decline in output in the third quarter there is an argument to be made that hikes have already done the job they were intended to do.
“But cutting interest rates won’t be a panacea. With growth over 2023 clocking in at the weakest since the financial crisis there are no easy answers.”
What does this technical recession mean for investors?
Against this backdrop, Wieladek expects the gilt markets to experience a lot of volatility as they are pulled in two different directions.
On the one hand, weak near-term Consumer Price Index data and weak output data may lead markets to price in more cuts and trigger a rally in gilts.
On the other hand, a resilient labour market and sticky wages could lead to the pricing of fewer cuts and a gilt sell-off.
However, Ed Monk, associate director at Fidelity International, urged investors to ignore the noise.
He concluded: “History shows short-term economic ups and downs have little to do with performance in the stock market. Markets tend to be forward looking and investors will already be seeing past data on recent economic performance."