Why is the UK economy in a technical recession?

Recently, according to data released by the Office for National Statistics, in the fourth quarter of 2023, the UK's gross domestic product (GDP) fell by 0.3% quarter-on-quarter. Although there is no official definition, given that the UK economy shrank by 0.1% quarter-on-quarter in the third quarter of 2023, two consecutive quarters of negative growth have been considered a "technical recession" by economists.

According to the latest estimates from the Office for National Statistics, the UK's GDP growth in 2023 will be just 0.1%, which is the worst economic growth performance since 2009, with the exception of the epidemic-affected 2020. The results also show that GDP per head has contracted for almost seven consecutive quarters, the worst performance since official economic data began in 1955.

So why is the UK in a "technical recession"? In fact, there are many reasons driving the continuous decline of the British economy, the author analyzes the following factors.

Brexit impact: After the UK leaves the European Union (Brexit), the whole UK becomes a single economy, the ability to resist risks is reduced, and the economic ties between the UK and the EU are artificially blocked. This could lead to increased barriers to trade and heightened business uncertainty, affecting business investment and cross-border trade. The post-Brexit adjustment period could have a negative impact on economic activity in the short to medium term.

Global economic environment: Under the influence of the international environment, in the fourth quarter of 2023, the UK's export trade fell by 2.9%, and the UK's domestic imports of goods and services also declined, and the overall trade deficit accounted for 2.2% of GDP. A slowdown in the global economy, particularly in the economies of major trading partners, could affect the UK's export performance and investment inflows.

The impact of COVID-19: The shock of the coronavirus pandemic has had a significant impact on the UK economy. At that time, the loose monetary policy in the United Kingdom led to severe inflation, which was later solved by tightening monetary policy, bringing about an economic recession in the process. Although there has been some economic recovery with the progress of epidemic control and vaccination, the pace and scope of recovery has been very limited.

Inflation and Monetary policy: UK Chancellor of the Exchequer Jamie Hunt recently said that high inflation remains the biggest obstacle to economic growth in the UK, as it forces the Bank of England to maintain a high base rate at a time when the current level of interest rates is holding back economic growth. High inflationary pressures could force the Bank of England to adopt tighter monetary policy, such as raising interest rates, which could dampen consumption and investment, further affecting economic growth.

There are also internal challenges, including stagnating productivity, high debt levels, problems in the housing market and funding pressures on public services, which will continue to weigh on the UK economy.

In 2024, reversing the decline in the UK economy will depend on the fiscal and financial sectors pulling the trigger. The Bank of England is expected to cut interest rates this year as inflationary pressures continue to ease. But with service inflation still high and employee pay rising strongly, the Bank of England is unlikely to start cutting interest rates in the first half of the year.

Overall, the Bank of England has to balance the need to slow price rises against the risk that keeping interest rates high will damage the economy, or risk further exacerbating Britain's recession. Without proper macroeconomic regulation and new sources of growth, the recession could become prolonged, as it has been in Japan.