UK narrowly avoids a technical recession in the fourth quarter

The latest quarterly UK GDP statistics show that the economy very narrowly avoided a technical recession, based on the definition of two consecutive quarters of negative growth.

Economic activity is estimated to have stagnated in the fourth quarter of 2022 compared to a 0.2% contraction in the third quarter (revised up from -0.3%).

Over the fourth quarter, warmer weather helped generate 0.3% growth in construction output, although this was offset by a 0.2% fall in wider production including manufacturing. Activity in the services sector slowed, and was flat over the quarter, as falls in education and transport dragged activity lower.

The expenditure measure of GDP shows that household spending grew by 0.1%, while government and corporate spending grew more robustly. However, a 1% fall in the volume of exports coupled with a 1.5% rise in imports offset any growth in domestic demand. Moreover, the contribution from inventories was significant at 1.1 percentage points. This suggests that over-production occurred during the quarter, which does not bode well for the coming quarters.

The outlook for the UK economy remains grim, even if it is slightly less negative than previously thought. The monthly GDP data highlights two important considerations. Firstly, distortions caused by the additional bank holidays in 2022 helped to keep growth from falling in the fourth quarter. And secondly, the monthly series shows that the economy contracted by 0.5% in December alone, suggesting that the recession may have only just begun. Industrial action in December would have also been a disruptive factor, but the scale of the fall suggests further pain ahead.

Due to the government’s change in the so-called “energy price guarantee”, most households will see a rise in home energy bills in January. Based on current policy, the support measures being offered to businesses will end in April, increasing pressure on companies to pass costs on through higher prices. Firms will also see the corporation tax rise, and super deductions on investment projects end.

The good news is that a warmer winter has helped keep inventories of natural gas high, pushing prices in wholesale markets lower. These lower prices should feed through to UK homes by late spring.  However, at around the same time the rise in Bank of England interest rates will start to be more widely felt, as more households will see lower fixed rates on mortgages coming to an end, pushing mortgage costs higher. The squeeze on household income is likely to hit activity further and cause a more meaningful decline in the economy through 2023.