UK narrowly avoids a recession

Latest Office for National Statistics (ONS) figures that showed monthly GDP fell by 0.5% in December 2022, leading to an overall estimate of a flat economy in the final quarter of the year.

Whilst the Bank of England is predicted we’re still heading for a recession later this year, but it will be shorter and shallower than had been forecasted.

Commenting on the figuresFederation of Small Businesses (FSB) Policy Chair Tina McKenzie said “While it is positive that the UK has technically avoided a recession in the second half of last year, the news will come as cold comfort to many thousands of small businesses.”

“In particular, the 0.5% fall in GDP in December is a red flag showing the economy stalled at the end of 2022, just when small firms were hoping for a traditional festive boost.”

“Looking ahead, the IMF and the Bank of England both predict a contraction in the size of the UK’s economy this year, leaving small firms facing a long period without growth. Just next month, many small firms who fixed their energy bills last summer as prices rocketed are worried that they will see three- or four-fold increases when the Government’s Energy Bill Relief Scheme shuts down, making a number of them unviable.”

“Our headline Small Business Index confidence tracker fell deeper into negative territory in the last quarter of 2022, at -46 points – far lower than it was during the Omicron lockdown, and only just an improvement from the depth plumbed during the second national lockdown in the final quarter of 2020.”

“That’s why we’re greeting today’s news with a strong dose of caution. Inflation is still a concern, and its effects will linger in the economy even once it falls back into a range we are more used to seeing. Interest rates remain high in the fight to curb inflation, with small businesses caught between elevated prices and greater debt costs.”

“On the plus side, financial markets are performing well, and the reopening of China’s economy will help improve general global economic conditions.”

“We want small firms to be in a position to take advantage of any improving economic conditions – and to create a groundswell of growth which will boost the overall economy. Setting them up for growth must be a key focus of the newly-created business and trade department, and we are looking to the Budget in mid-March to set out a positive agenda for small businesses and the self-employed.”

“Late payment must be tackled, to get small suppliers the funds they are due in a timely fashion. The day-one taxes – like business rates – that take a chunk out of budgets before small firms make a penny in turnover should be examined, while the VAT threshold should be increased to encourage revenue growth.”

“The cuts to R&D tax credits should be reversed, given the huge contribution to overall R&D made by small firms, and the Government’s own newly-reaffirmed focus on science and technology. More people should be helped to reskill and upskill, while bringing in Help to Green vouchers would allow small firms to cut their emissions and their energy bills, while boosting the economy.”

“We know what will help, and now need the Government to work with us and turn an economy with GDP in the doldrums into one galvanised by a dynamic and growing small business community.”

Kitty Ussher, Chief Economist at the Institute of Directors, said “Back in August, the Bank of England predicted we would be in a full-blown recession by now. However, today’s data shows their forecasts were far too pessimistic and, to date, the technical definition of a recession has been avoided. Private sector weakness is mainly in the consumer-facing sectors, but this is compensated for by stronger activity elsewhere.”

“In fact, the main drivers of the weak economy in December were a fall in public sector activity, notably health and education, combined with the postponement of usual sporting fixtures. If it were not for those factors, the economy would have grown on the quarter.”

“This has two implications. First that the Bank may need to raise interest rates a little further to squeeze out inflation. And second, that the government may find it has higher tax revenues at its disposal when it considers its options for the Budget to be held on March 15th.”

Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown said ‘’Although a distinct chill descended in December, as bad weather, strikes and more painful price hikes blew in, the downturn wasn’t deep enough to push Britain into recession. There is still a chance the economy will still suffer two back-to-back quarters of negative growth this year, but the murky stretch of water ahead is set to be shallower and less lengthy than predicted in the Autumn when the country was also wracked with financial instability.”

“So, instead of doing the timewarp and bracing for a recessionary return to the seventies, sparked by energy shocks, soaring inflation and industrial strife, we could be heading for an early noughties-style period of stagnation.”

“The dot.com bubble burst in 2000, sparking a US slide into recession in March 2001, with France and Germany following suit. However, the UK narrowly avoided the same fate, with British shoppers providing a spending boost to lift growth. Back then, in March 2001, US R&B singer Joe was top of the billboard charts with the track Stutter and it looks like the UK might just stutter and stumble through the cost-of-living crisis, as consumers splash out on socialising and sunshine-filled holidays, to compensate for the grey days of winter. The FTSE 100 has provided cheer, racing up to surpass recent record highs as the energy crisis has eased and brighter spots emerge for the global economy.”

“There is, of course, still a chance that with the UK housing market set to turn from a quiver to a shiver as painful rate rises start to hit, consumer confidence, which has been inching up, may start to seep away again. Output across the economy is still 0.5% lower than before the pandemic hit. With interest rates set to rise further, shoppers may baulk at swallowing yet more painful price rises, which could still hit consumer discretionary stocks listed on the FTSE 100, with some companies warning of uncertain months ahead. However, inflation is inching down here in the UK and in other nations around the world, which have been sideswiped by punishing price spirals. There is also more confidence washing around, helped by the re-opening of China’s vast economy.”

“This positive sentiment is helping the Footsie keep a spring in its step for now, as it hovers near fresh record highs, and could keep buoying the confidence of British consumers and companies in the months ahead.”