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15 February 2024

This isn’t a “mild” recession

The headline GDP figures mask a 15-year living standards disaster for Britons.

By Duncan Weldon

The UK, according to official data, entered recession at the end of last year. National income fell by 0.3 per cent in the final quarter of 2023, following a contraction of 0.1 per cent in the third quarter. Two consecutive quarters of falling GDP meets the traditional definition of a recession and, as tomorrow’s newspaper headlines will no doubt remind voters, Rishi Sunak’s pledge to “grow the economy” has suffered a lethal blow.

But beyond the headlines, the news of an official recession is less interesting than the underlying data. Talk of a “mild” or “merely technical” recession misses what is happening to households. GDP per head – a far better measure of people’s actual economic experience – has fallen for the last seven quarters, the longest continual decline since modern records began in 1955. It fell by 0.7 per cent across 2023 as a whole, even while the economy eked out some tepid growth, and is down by 1.7 per cent since early 2022. 

Even more worryingly, the falls in GDP per head increased over the course of last year, with a fall of 0.1 per cent in the first quarter, 0.2 per cent in the second quarter, 0.4 per cent in the third quarter and 0.6 per cent in the final quarter. This is hardly a reassuring pattern.

Wages, adjusted for inflation, ended 2023 at roughly the same level as in early 2008. Fifteen years of no real pay growth is something Britain has not experienced in the 250 years since the Industrial Revolution. The big picture, then, is one of a stagnant economy and a serious squeeze on living standards. Many Britons will no doubt be surprised to learn that the recession has only just become “official” – they have been experiencing one since 2022.

Even the broad GDP figures are dismal: the UK itself grew by just 0.1 per cent in 2023 as a whole, compared to growth of 2.5 per cent in the US and 0.5 per cent in the eurozone. Taking a longer view, the British economy is just 1 per cent larger than it its pre-pandemic level at the end of 2019, compared to 8.2 per cent in the US, 4.5 per cent in Canada, 3.6 per cent in Italy and 1.8 per cent in France. 

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Some commentators have drawn a certain schadenfreude from the fact the UK has outgrown Germany over this period but the wider picture is of weak British performance. The post-pandemic stagnation in growth follows a longer-term period of relative decline. In the decade before the 2008 financial crisis, the UK enjoyed the second-fastest growth among the G7 group of leading economies, behind only the US. In the decade since it recorded the second-lowest growth, ahead of only Italy.

Others have taken solace from the poor GDP figures by suggesting that a recession may prompt the Bank of England to reduce interest rates from their 15-year high of 5.25 per cent. But any argument that bad economic news is actually good because it will lead to a change in policy is usually nonsense. Bad news is bad news.

The weaker-than-expected out-turn may well accelerate rate cuts by the Bank but this is unlikely to do much to revive animal spirits. Changes in interest rates, as the Bank is often keen to point out, take time to be felt in the wider economy. The so-called long and variable lag of monetary policy can be anything from 12 to 24 months. In other words, the full impact of the 14 consecutive rate rises is yet to be felt. Even if the Bank started cutting rates tomorrow, we should not expect an immediate effect on growth.

The official news that Britain is in recession creates a political headache for Rishi Sunak and Jeremy Hunt ahead of the Budget on 6 March and this year’s general election. But it does not change the fundamental picture of the British economy. That picture is of an economy that has undergone an acute squeeze in living standards since 2022 following a longer period of wage stagnation since 2008.

The recession could be revised away in the months ahead but the underlying problems will not. And while the headline GDP data suggests the recession will be mild, the figures for GDP per person are anything but. For most Britons, the recession is neither new nor mild.

[See also: Austerity is coming for Europe]

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