GDP fell 0.1% in December – business industry reaction

Latest GDP figures has indicated that the UK ended 2023 in recession.

The figures showed that GDP fell 0.1% in December, following a 0.2% rise in November. GDP was down 0.3% over the three months to the end of December, a second consecutive quarter of negative growth, pushing the UK into a technical recession.

The fall reflects weakness across all three major sectors of the economy.Services output fell 0.2% quarter-on-quarter whilst construction output fell 1.3% quarter-on-quarter. Production fell 1.0% quarter-on-quarter. The economy has shrunk by a total of 0.4% over the last two quarters of 2023, triggering a technical recession.

The last five recessions in the UK have all seen the economy shrink by more than 1% in their first two quarters (see figures below). The closest to this year’s figure is in fact the double-dip recession-that-wasn’t of early 2012.

The first published estimates suggested that the economy had shrunk by 0.5% in late 2011 and early 2012. But when more data came in, it turned out that the economy had actually grown by 1% in that period.

Responding to Office for National Statistics figures showing that GDP fell by 0.3% in the final quarter of 2023, following a fall of 0.1% in the third quarter, Martin McTague, National Chair of the Federation of Small Businesses (FSB), said “The news that we’re in a recession will just confirm what many small firms have been saying for some time now – it’s very tough out there.

“Our research found that confidence among small firms has been in negative territory for seven straight quarters, due to the energy price crisis and the knock-on impact on the cost of doing business.

“There are big differences between sectors, with the hospitality sector recording by far the gloomiest confidence score, underlining that economic pain and strain are far from equally spread out.

“Small firms are grappling with high interest rates, energy costs much greater than they were a couple of years ago, and weak consumer demand. Two in five small firms said their revenues decreased over the final quarter of last year, with only a third saying they increased, showing that the shine has definitely come off the so-called ‘golden quarter’, to small firms’ detriment.

“The Government needs to foster an environment where small firms can grow, to the overall benefit of the economy, and to put this period of stagnation and shrinkage behind us once and for all. We have set out an ambitious but achievable programme for small business growth at the forthcoming Budget.

“Uprating the Employment Allowance to keep it in line with recent raises in the National Living Wage, raising the VAT threshold from £85,000 to at least £100,000, bringing back tax-free shopping for overseas visitors, ensuring the future of the Recovery Loan Scheme to get funds to start-up and scale-up businesses, and bringing in a national Business Energy Advice Service to help small firms with eye-watering energy costs would all provide a launchpad for growth.

“Small firms have the drive and the potential to get the economy back up and running, and to put this period of economic decline firmly behind us.”

Dr. Roger Barker, Director of Policy at the Institute of Directors, said “Confirmation that the UK economy failed to avoid a technical recession in the second half of last year is a psychological blow for business.

“A decline of 0.1% in December translated into negative growth of 0.3% across the quarter as whole. As this was the second consecutive quarter of negative growth, the criterion for a technical recession was met.

“In December, the output figures were dragged down by a 0.1% decline in the services sector and a 0.5% contraction in construction. However, the production sector actually grew by 0.6%.

“Looking at 2023 as a whole, the economy grew by 0.4%. December’s figures do not make a significant difference to the big picture: that the economy largely moved sideways last year. Furthermore, the current technical recession cannot be compared to the last recession in the first half of 2020, when GDP fell more than 20% in a single quarter due to the onset of the Covid pandemic.

“Business leaders will now be shifting their attention to the future. Recent data from our members suggests that business confidence has been slightly improving in recent weeks. It is important that this progress is sustained by the policy decisions of the Chancellor and the Bank of England.”

Suren Thiru, Economics Director at ICAEW said “While the UK now has the unwanted tag of being in recession, this owes more to temporary factors, including strike action suppressing output in December, than the wider economic pain you typically associate with technical downturns.

“Though the shallowness of this recession provides comfort, these figures also confirm that our economy remained locked in a cycle of persistent stagnation throughout 2023 as a myriad of headwinds, including high inflation, weighed heavily on activity.

“Although more recent indicators suggest that the UK will probably exit recession this quarter, our economy is in a challenging period, with the lagged impact of earlier interest rate rises likely to continue squeezing GDP for some time.

“A struggling economy makes next month’s Budget trickier because it means lower tax revenue for the government, while these downbeat figures will also raise concerns that the Bank of England have overdone the interest rate rises.”

James Burgess, Head of Commercial and insolvency expert at Atradius, said “While the stabilisation of inflation rates at 4% in yesterday’s announcement was certainly welcome news to many businesses across the UK, the alarming news that the UK fell into recession means that businesses must remain vigilant to protect themselves from insolvency throughout 2024.

“Although the news of recession is not the desired outcome for the UK economy, there is still light at the end of the tunnel if businesses ensure they are taking steps to recession-proof themselves. This includes safeguarding supply chains, diversifying essential contracts where possible, and working closely with your trade credit insurer’s sector experts to keep close to the pulse of your sector.”

Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said “There are plenty of excuses for the weak GDP data – many other countries have also slipped into recession, the numbers may be revised, and leading indicators are already improving. But the news is bad enough that it should have some implications for policy too.

“In particular, the Bank of England expected the economy to be flat in the fourth quarter of last year. On top of a downward revision to GDP in the first quarter, this means that the economy is already 0.4 per cent smaller than assumed in the February Monetary Policy Report.

“The MPC’s job is to worry about inflation, not growth, but the case for early rate cuts is now even stronger.

“There will also be more pressure on Jeremy Hunt to cut taxes in the Spring Budget. The Chancellor needs to be careful here. There is already some additional stimulus from the cuts in National Insurance in January and from the increases in pensions, benefits and the national minimum wage in April.

“The key driver of the slump into recession is the increase in interest rates. It is important that the Chancellor avoids doing anything that might reignite inflation and encourage the Bank to keep rates higher for longer. But there is room for some well-targeted tax cuts that would both support demand and boost the productive potential of the economy.

“Nonetheless, the UK’s problems clearly run deep, and a few tweaks to interest rates and tax rates won’t fix them. The longer-term story is that the economy is facing two decades of stagnation. There is an urgent need for the government to pursue pro-growth policies across the board.”