Minister faults inflation, high interest rates as UK economy plunges into recession

Britain is in recession, official data showed Thursday, dealing another blow to embattled Prime Minister Rishi Sunak, whose Conservative party is forecast to lose a general election expected this year.

Gross domestic product shrank 0.3 percent in the fourth quarter of 2023 after contracting 0.1 percent in the prior three months, the Office for National Statistics (ONS) said in a statement.

That places the economy in recession, which is defined as two quarters of falling GDP in a row.

While economists predicted that the recession could be short-lived, the data is a big setback for Sunak, who has placed economic growth as a key priority.

It comes as the Conservatives badly trail the main opposition Labour party in polls.

Ahead of the general election, voters take part in two by-elections on Thursday, with the Conservatives fearful of losing one-time strongholds in Wellingborough, central England, and Kingswood in the southwest.

‘Mild recession’ 

“The news that the UK slipped into technical recession in 2023, will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections,” said Capital Economics analyst Ruth Gregory.

“But this recession is as mild as they come and timely indicators suggest it is already nearing an end.”

Finance minister Jeremy Hunt noted that stubborn inflation and high interest rates were behind the output fall — but insisted the economy was “turning a corner”.

“While interest rates are high — so the Bank of England can bring inflation down — low growth is not a surprise.

“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low.

“Although times are still tough for many families, we must stick to the plan — cutting taxes on work and business to build a stronger economy.”

Confirmation of the recession comes one day after separate official data showed that UK inflation held at 4.0 percent in January from December, or double the Bank of England’s target rate.

The January reading was better than market expectations of an increase to 4.2 percent, but inflation nevertheless remains elevated, extending a cost-of-living crisis for millions of people in Britain.

Hunt added that bringing down elevated inflation remained the government’s “top” goal.

– Sunak pledge ‘in tatters’ –

But Labour slammed the government’s stewardship of the economy, adding that Sunak’s vow to deliver growth was in “tatters”.

“The prime minister can no longer credibly claim that his plan is working or that he has turned the corner on more than 14 years of economic decline under the Conservatives that has left Britain worse off,” said Labour finance spokeswoman Rachel Reeves.

“This is Rishi Sunak’s recession and the news will be deeply worrying for families and business across Britain.”

The BoE’s main interest rate sits at a 16-year high of 5.25 percent, as it seeks to bring inflation back to its 2.0-percent target.

However, rising interest rates also ramp up loan costs for individuals and businesses, further worsening the nation’s cost-of-living crunch.

Yet annual UK inflation has tumbled since striking a 41-year peak of 11.1 percent in October 2022.

Global inflation soared as the invasion of Ukraine by major oil and gas producer Russia two years ago sent energy prices rocketing.

In response, the world’s major central banks helped to cool inflation by hiking borrowing costs.

AFP