Read time: 8m 38S

What happened? 

The UK economy has fallen into a recession, after the economy shrunk by 0.3% in the last three months to December 2023. 

It comes after the Office for National Statistics (ONS) reported a contraction of 0.1% between July and September last year. 

More on the story 

In 2023, the UK economy grew by 0.1%. The annual growth figure is the weakest since 2009 (excluding the Covid-19 years). 

The news also comes at a time when the latest inflation figure is unchanged, at 4%. The Bank of England’s governor, Andrew Bailey stated the figure is “encouraging”, but he also hinted that it would not mean that earlier rate cuts will not happen. 

The figures also raise some concerns about whether Rishi Sunak has met his pledge to grow the UK economy. I expand upon this point more below. 

The UK: A Quick Glance 

Population: 67.33 (2021) 

Current Prime Minster: Rishi Sunak of the Conservative Party 

Current Mayor: Sadiq Khan 

Chances of the Conservative Party winning the next election: Medium... 

What factors have led to this? 

• People are generally spending less. With high inflation rates, interest rates and a cost-of-living crisis, it’s no wonder why people are cutting back on spending. If we focus on homeowners-mortgage prices have gone up, which means that such households are spending more on their mortgage than they were five years ago. According to the ONS, monthly mortgage repayments are up 61% for an average semi-detached home in the UK. It leaves them with less disposable income on essentials such as paying for their energy bills or weekly food shopping. 

• An increasing amount of strikes. Strikes, including doctors strikes and rail strikes have both played a role in the negative growth the UK is experiencing. With the former, less doctors on the wards, mean even longer waiting times for patients and people to be seen, which leads to a further stretch on the already struggling resources within the NHS. With rail strikes, it has meant that people have had to either take alternative routes to work, or has led them to not go to work on the affected days altogether. For the latter, since there are less customers buying tickets, it has a direct effect on the amount of revenue train services can make for that day or month. Purchasing train tickets is an important factor to the UK economy. 

• A fall in school attendance. Taken from this article, I was a bit surprised by this factor. Attendance levels at schools dropped by 1%. Part of this trend was due to train strikes. According to this article, some reasons there has been a drop in attendance include: the cost-of-living crisis, shifting attitudes because of the Covid-19 pandemic, an increased willingness among parents to take their children on holiday during termtime, and a rise in mental health concerns among young people. I believe this point has played a role in the recent figures because a decrease in the number of students, leads to a decrease in the resources needed in the overall functioning of a school.  

Before we go any further... 

Let’s go over some key questions. 

What is a recession? It’s when an economy fails to grow for two successive quarters. 

How long does it last? A typical one lasts around 10 months. 

Why does it occur? There are a number of reasons. They are typically the result of economic imbalances within an economy. Factors such as a rise in unemployment (which leads to less spending within an economy), a fall in stock prices, the release of negative company earnings. 

How many recessions has the UK had? Recent recessions include: the Early 1990s recession (1990 Q3-1991 Q3), the 2008/9 recession, the Covid-19 one which happened in 2020, and now the 2023/4 one we’re going through now. 

What is the difference between a recession and a depression? A recession is a downtrend in an economy that can affect employment and production and can lead to a decrease in household spending and income. A depression is a downtrend in an economy, which is longer lasting. The effects of this are more severe, such as widespread unemployment in various sectors.  

Are there any other countries who are in a recession? Yes. Japan (another G7 member), Denmark, Finland, and Peru are some other examples.  

What implications could this story have? 

• There are questions about whether or not Rishi Sunak has met his pledge to grow the economy. In January 2023, Sunak announced that he wanted to grow the economy. As a reminder, Sunak wanted to: Half inflation, grow the economy, reduce national debt, cut NHS waiting lists and pass new laws to stop small boats. With an obvious focus on the UK economy, we can come to the fair conclusion that Sunak hasn’t met this specific pledge. UK GDP has continued to contract in the last 2 quarters- the very opposite of what he set out to achieve. In addition, the government has never publicly stated what measure they would use to assess economic growth within the country. This highlights how difficult it will be to achieve this in the future and the huge task they have at hand. 

• Should we question the UK’s strength among the G7 nations? According to the International Monetary Fund (IMF) prediction, the UK is set to have the slowest growth out of all the G7 nations. The IMF also forecast that the UK economy to grow by 0.6%, down from a previous figure of 1.0%. It’s also weaker than the growth of 0.9% and 1.3% for Germany and France respectively. Some implications this forecast may have include the likelihood that the Bank of England will keep interest at their elevated levels, in an effort to curb the high inflation we’re still experiencing. However, high interest rates increase the value of a country's currency. This leads to cheaper prices for exports, but higher prices for imports. Imports within a country play an important role when it comes to a country’s GDP. For the UK, it means raw materials we import, for example, will become more expensive and this may have a trickledown effect and increase prices for businesses’ operating with raw materials and the consumers who purchase them. Other effects of keeping interest rates high may mean borrowing becomes more expensive for businesses, and mortgage rates increase for homeowners.  

• Let’s think wider- Which country will be next? The EU narrowly avoided a recession in the second half of 2023. As I have already stated, Japan is another G7 member that is in a recession. However, their situation is a bit different to the UK, as they are in an era of super low interest rates. How the Bank of Japan responds to this new development, will be different than that of how the Bank of England will respond. With the number of countries who are in a recession slowly expanding, it begs the natural question-which country is next? Considering the high inflation, high interest rates, high energy prices, wars and conflicts in various places, geopolitical instability, changes in fiscal policies among other national and international issues the world is facing, more countries are bound to fall into a recession. Whether now or sometime in the future, some predict that the US will fall into one. The US is dealing with very high national debt and high interest rates. In the country’s latest jobs report, employes added 353,000 new jobs for the months of January, defying expectations of a downturn once more. In January, the unemployment rate was 3.7%, which was close to a 50-year low. With reports of strong job reports, even amid high interest rates, it’s an interesting and hard one to predict. 

• Should we be concerned about the prospects of the UK’s future growth? In the short term, yes-to an extent. In the long-term, I’d say that there is nothing alarming to worry about. The former is because the news could affect investment in the UK in the short term. The crux of this is that less investment means less potential for growth. Less growth means less money to spend on various sectors because no new money is coming into the economy. This could affect the UK’s national budget and affect how much money they can spend on essential services, such as on the NHS, housing and on education. Although the story is a cause for concern, we know that recessions don’t last forever. Let’s not forget about the 4 Stages of The Economic Cycle: Expansion, Peak, Contraction, Trough. 

Expansion-Real GDP is rising 

Peak-Real GDP is at its highest point. It stops increasing and starts to decrease. 

Contraction-GDP starts to fall 

Trough-GDP stops decreasing and starts to increase. 

You can probably guess which stage the UK is at right now. Brighter days are coming. It’s just a matter of when. 

What makes this recession different to the 2007-9 one? 

In a nutshell, the 2007-9 recession was caused by losses on mortgage-related financial assets. It began in 2007 when large amounts of mortgage-backed securities and derivatives significantly dropped in value in the US housing marktet. This began to cause tensions in global financial markets and affected economies all around the world. For the UK specifically, it took us around five years to return to the size the UK economy was at prior to the recession.  

Some of the effects of the current recession include: 

• Rises in home repossessions, unemployment and debt 

• Young people experiences high levels of unemployment and job losses. 

• It led to greater regulation within the global financial industry. 

Compared to the last one, this recession... 

• Seems to be a ‘mild’ one. The 2007-9 one was deeper and much more widespread, since it began in the US housing market. According to Ruth Gregory, deputy chief UK economist at Capital Economics, “This recession is as mild as they come.” Given the changes to fiscal and monetary policy by the Bank of England, high interest rates and a range of other factors, one can see that a recession was always on the table. Recent data has added some early signs of a recovery for the British economy. For example, British retail sales grew by 3.4%, the largest jump in almost three years. Speculation that the UK Chancellor, Jeremy Hunt, could announce tax cuts in the next UK budget, which would boost spending and the struggling image of the Conservative Party (just before a call for a general election, eh?). However as Lord Rose stated “It looks like a duck, it quacks like a duck, it walks like a duck, it is a duck- it is a recession.” A recession, no matter how, mild or not it may be, should still be something to be concerned about. 

• There are more measures in place. After the 2007-9 financial crisis, governments around the world introduced tougher financial regulations and policies in place. For example, the Bank of England now has more power to intervene and guide the UK financial markets., if some sort of financial wobble were to occur.  

Closing thoughts: 

People have been expecting the UK to dip into a recession for some time now, and it has finally happened. It does certainly feel like we’ve been in one for a while, especially given the fact that everything is more expensive.  

As a Gen-Z, it is somewhat scary to know that your economy isn’t doing well and worries about my future have come to mind since the announcement. However, I like to personally remain optimistic about it. I see recessions, although worrying, a necessary part of an economy. We do need some sort of re-set from time to time, and I know after a Contraction, comes the Peak, and then Expansion once more. How long this one will last for, no one really knows. However, we do know that better days are coming, as this doesn’t seem to be as deep as the one in 2007-9. 

This isn’t the last we’ll hear about a country falling into one-I think other countries will go down the same path, and experience different lengths of this economic downturn. 

That’s it for this week! 

What are your thoughts on this story? Do you think more countries will fall into a recession? What other impact do you think this story will have on the UK?

Until next time, remember to stay curious! 

Further resources used: 

‘UK economy fell into recession after people cut spending’ - Article by the BBC 

‘Interest rates won’t fall due to 4% inflation, says Bank boss’ - Article by the BBC 

‘The 2008 Financial Crisis-5 Minute History Lesson’ - YouTube video by The Plain Bagel 

‘Interest Rates and Balance of Payments’ - Article by Economics Help 

‘UK shoppers pick up their spending, signalling quick end to recession’ - Article by Reuters 

Disclaimer:  

This blog is for informational purposes only. Parah Insights is not associated with the news sources in this blog, and sharing does not equal endorsement. Parah Insights does not provide financial, tax, legal or accounting advice – always consult your financial and legal advisors to determine what’s right for you and your business.