The UK economy has been facing some challenges, but as of now, it has looked to avoided a recession. Let me provide you with more details:
- Recent Situation:
- The GDP (which measures the value of goods and services produced) showed no growth in the three months from July to September 20231.
- The outlook for UK industry was among the weakest recorded outside of financial crashes and the Covid-19 pandemic2.
- House prices dropped by 5.3% in the year to August 2023, the fastest annualized rate of decline since 20092.
- Positive Revisions:
- The Office for National Statistics revised past growth figures, showing that the economy rebounded faster and more strongly from Covid lockdowns than previously thought.
- By the end of 2021, the economy was 0.6% bigger than its pre-pandemic level, rather than 1.2% smaller as previously estimated2.
- Bank of England’s Dilemma:
- Despite these positive revisions, the current signs of distress from different parts of the economy will add to the Bank of England’s dilemma.
- The Bank must decide whether to raise interest rates again when its monetary policy committee meets later this month2.
- Financial markets believe the rate-setting monetary policy committee will raise borrowing costs by 0.25 percentage points to 5.5% and then leave them at that level for a considerable period2.
- Chief Economist’s Perspective:
- The Bank’s chief economist, Huw Pill, hinted that rates would soon hit a plateau during a speech in Cape Town, South Africa.
- He favored a “Table Mountain” approach to bring inflation down to the government’s 2% target2.
- However, there is a risk that the Bank’s anti-inflation measures could cause unnecessary economic damage2.
- Annual GDP Growth (2022 vs. 2021):
- In terms of annual GDP growth, the UK recorded the fastest rate among the G7 nations in 2022, growing by 4%1.
- However, it’s essential to consider that in 2021, the UK economy was still impacted by the Covid-19 pandemic, which affects the comparison.
- When looking at other periods not influenced by the pandemic, the UK’s growth does not compare as favorably to other G7 countries.
- Pre-Pandemic Comparison (2019 to 2022):
- Between the final quarter of 2019 (pre-pandemic) and the final quarter of 2022, the UK’s GDP growth was the lowest in the G7, at -0.8%.
- Remarkably, the UK is the only G7 country where the economy remains smaller than it was before the pandemic1.
- Recent Analysis:
- Despite improved growth projections, the UK economy is still expected to lag behind other G7 countries in 2023.
- Only Germany, which fell into a recession at the start of the year and is set to stagnate throughout 2023, is projected to perform worse than the UK2.
- Long-Term Perspective:
- The UK’s economic recovery has been weak compared to other G7 nations.
- The UK economy is still over 2% smaller than it was at the start of the crisis in 2007.
- Italy is the only other country that has performed worse in terms of economic growth.
- In contrast, Germany has grown by nearly 4%, and Canada by nearly 6% since the crisis began3.
In summary, while the UK showed strong annual GDP growth in 2022, its overall economic performance remains a subject of scrutiny, especially when considering pre-pandemic levels and long-term trends. Policymakers and economists are closely monitoring the situation, especially given the challenges posed by interest rate increases and economic distress in various sectors.
BBC: The UK’s economy was expected to shrink by 0.2% in 2023, but avoid going into recession, when the Office for Budget Responsibility (OBR) produced its forecast alongside the Budget in March.
However, the government’s independent forecaster warned that once rising prices were taken into account, household incomes would drop by 6% in 2023 and 2024. This would be the largest two-year fall in living standards since the 1950s. In normal times, a country’s economy grows. People’s incomes tend to rise as the value of the goods and services the country produces – its Gross Domestic Product (GDP) – increases.
But sometimes the level of GDP falls, and that’s a sign that the economy is doing badly.
A recession is usually defined as when GDP falls for two three-month periods – or quarters – in a row.
The last time the UK’s economy went into recession was in 2020, at the height of the coronavirus pandemic. The UK avoided falling into recession at the end of 2022 after the economy performed better than expected. The economy continued to grow in the first two quarters of 2023, although it stagnated in the third quarter. According to the official statistics, it saw zero growth between July and September, although that was slightly better than predicted with some analysts having expected it to shrink. The OBR said in March that it expected the UK economy to shrink by 0.2% in 2023, but was not predicting falls in two successive three-month periods, meaning, technically, the country would avoid recession. It then thinks the economy will grow by:
The next OBR forecast is expected at the same time as the Autumn Statement on 22 November. Despite avoiding a recession, the UK has been one of the weaker of the G7 countries since the start of the Covid pandemic. The latest data indicates that the UK’s economy has only seen faster growth than Germany since the end of 2019, and has expanded at the same rate as France. In October, the International Monetary Fund (IMF) predicted that the UK would grow by just 0.5% this year. However, that is better than Germany, and would keep the UK out of bottom place for growth among the G7. But it downgraded the UK’s prospects for next year, estimating the economy will grow by 0.6%, which would make it the slowest growing developed country in 2024.
For most people, economic growth is good. It usually means there are more jobs, companies are more profitable and can pay employees and shareholders more. The higher wages and larger profits seen in a growing economy also generate additional money for the government in taxes. It can choose to spend more on benefits, public services and government workers’ wages, or cut taxes. When the economy shrinks, these things can go into reverse – but governments normally still have a choice on public spending. Some people might lose their jobs, and unemployment could rise. Graduates and school leavers could find it harder to get their first job. Others may find it harder to be promoted, or to get big enough pay rises to keep pace with price increases. However, the pain of a recession is typically not felt equally across society, and inequality can increase. Benefit recipients and those on fixed incomes are particularly likely to struggle. When the economy is struggling to grow at the same time as there is high inflation, there can be a situation called “stagflation”, which is very difficult to solve.
When a country is in a recession, the Bank of England – which is independent of government – would usually cut interest rates. This makes it cheaper for businesses and households to borrow money which can boost spending and growth. However, prices have been rising very quickly in the UK, and the Bank has chosen to increase interest rates to tackle that. The recession in 2020 only lasted for six months, although the 20.4% reduction in the UK economy between April and June that year was the largest on record. The previous recession started in 2008 due to the global financial crisis, and went on for five quarters.
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Source: BBC News – Home
