Whilst GDP declined in the third quarter of 2022, growth in both October and November is a sign that the UK could avoid a recession altogether
Recession
Technically, a recession is defined as a situation where there are two consecutive quarters of negative gross domestic product (GDP). The UK was last in recession in the first two quarters of 2020, as a result of the Covid-19 pandemic lockdowns, with GDP falling 2.2% and 19.8% respectively. As at the end of September 2022, the country was still 0.8% below its pre-pandemic level.
Despite the cost of living crisis, the UK economy was still growing during the first half of 2022. However, during the third quarter of 2022, GDP contracted by 0.3%. Given this, there were fears that the contraction would continue into the fourth quarter, such that the UK economy would fall into recession as the cost of living crisis intensified.
Nevertheless, GDP grew by 0.5% in October 2022, and the Office for National Statistics (ONS) have just reported that GDP increased again in November 2022 by 0.1%.
GDP growth during both October and November 2022 has largely been driven by growth within the services sector, up 0.7% in October and by 0.2% in November. In contrast, production fell by 0.1% in October and by 0.2% in November. Whilst the construction sector posted growth of 0.4% in October, it remained flat in November (i.e. 0%).
Despite the problems with labour shortages, unemployment has been creeping up, increasing by 23,000 during the third quarter to 1,247,000 (up 0.1%).
Given the growth in GDP in both October and November, should growth have continued into December, then the UK economy will have avoided a technical recession with positive GDP overall in the fourth quarter. Indeed, it would take a fall of 0.5% in GDP in December 2022 for GDP to have contracted overall in the fourth quarter. Nevertheless, with GDP growth in October and November being driven by growth in the services sector, a report from the British Retail Consortium (BRC) that sales increased by 6.9% in December is a positive sign that growth may have continued into December.
However, in these turbulent times, nothing is guaranteed and nothing can be taken for granted. For example, the widespread strike action could well have led to disruption within the economy during December, that could easily produce an overall contraction sufficient to have caused a GDP fall in the fourth quarter
The Economic Outlook For 2023
The principal cause of the current economic problems, and the risks of recession, is the cost of living crisis, driven by the increases in the costs of energy, fuel, and food. Nevertheless, inflation (as measured by the Consumer Prices Index (CPI)) fell from a high of 11.1% in October 2022, to 10.7% in November 2022. Moreover, with fuel prices on the way down, and with wholesale energy prices now also falling significantly, it is forecast that inflation will fall sharply during the course of 2023. Indeed, the Prime Minister, Rishi Sunak, included within his 5 promises at the beginning of this year, an undertaking that inflation would halve this year.
With inflation, energy, and fuel prices all coming down, the UK economy could well avoid a recession altogether in 2023. If there is one, then it is likely to be a lot milder than many had feared. A lot however will depend upon the direction of interest rates.
The Bank of England has essentially been shadowing the direction of American interest rates over the last 4 months on account of the fact that comparatively high American rates caused the pound to collapse to almost parity last September. Hence, will American interest rates continue to climb despite the fact that inflation has already peaked in the United States, thereby forcing the Bank of England to continue increasing interest rates in the UK?
Some are forecasting that American interest rates will rise by a further 0.75%. That means that the Bank of England by shadowing American rates, will likewise increase interest rates by the same amount, which would mean that the rate rises would peak at 4.25%. That may well be sufficient to plunge the UK economy into a mild recession. The only silver lining in the interest rate increases is that they have caused the pound to strengthen over the last 4 months (with the pound dollar rate rising from almost parity to $1.22). That in turn has reduced the cost of imports, thereby contributing to the reduction in inflation.
Reaction
Commenting upon whether the UK economy may yet avoid a recession, the Chancellor of the Exchequer, Jeremy Hunt, stated: "We have a clear plan to halve inflation this year – an insidious hidden tax which has led to hikes in interest rates and mortgage costs, holding back growth here and around the world. To support families through this tough patch, we will provide an average of £3,500 support for every household over this year and next – but the most important help we can give is to stick to the plan to halve inflation this year so we get the economy growing again."
Nevertheless, the Head of Investment Research at the Wealth Club, Jonathan Moyes, added a note of caution on the issue of a possible recession: "A modest 0.1% growth in GDP flies in the face of a sustained decline in business confidence surveys through the second half of 2022. Many will be taken by surprise by today’s announcement. We have seen retailers report stronger than expected earnings reports for Q4 over the past week, and it appears a stronger than expected consumer services and services more broadly have helped the UK economy defy gloomy expectations."
Moyes added: "It may be too soon to mark the beginning of a turn in sentiment for the UK, but a quiet consensus appears to be forming. Energy prices are falling sharply, China is reopening and interest rate expectations have eased significantly."
