At a Glance
- The UK’s Office for National Statistic’s gross domestic product (GDP) estimate for October to December 2023 shows a 0.3% fall. As the second consecutive contraction, the UK economy has officially entered a recession.
- The Labour Party, the UK’s official opposition, went on the attack, blaming the governing Conservative Party—and specifically Prime Minister Rishi Sunak—for the situation.
- The news comes following a difficult week for Labour, after it made a significant U-turn on plans to borrow GBP 28 billion a year to fund its “Green Prosperity Plan.”
The Economic Data
Issue
The UK’s Office for National Statistics published this week the real gross domestic product (GDP) estimate for October to December 2023, showing a 0.3% fall. At the very least, the data tips the UK economy into a recession for the final quarter of 2023, as the second consecutive quarter without growth, following an unrevised 0.1% fall in Q3.
While some people attempt to qualify this as a “technical recession” given the absence of a sharp and dramatic downturn, this week’s figures are more severe than most economists’ predictions of a 0.1% decline. Across key sectors of the economy, the 0.3% contraction is broken down into a decline of 0.2% in services, 1.0% in production, and 1.3% in construction output.
What Does it mean?
The fact that the UK is now in recession—and the associated headlines—is cause for real concern even before looking at the breakdown in the data, which paints an even more dreary picture of the UK’s economic health.
Preliminary data on productivity, measured by output per worker shows a 0.0% growth in terms of output per hour, and 0.6% in the output per worker when compared to the previous year. Adjusting for GDP per head, productivity in Q4 dropped by 0.6% and, tracing recent years, has endured seven quarters without growth per head. GDP per head has been in the negative for the longest period on record but this week's data shows an accelerated decline per quarter since Q1 of 2022. Based on GDP per head—some may consider the last two years of negative growth per head a recession in and of itself, particularly when accounting for the growing population, which goes some way to “flatter” this week's data. Without the record level of immigration which the Government has tried unsuccessfully to reduce, the country would have likely tipped into a recession far sooner.
Growth forecasts expected later this year, led by slower inflation, and sustained wage growth, will require time to come to fruition. In the meantime, living standards for the average person in the UK are falling, and overcoming this will be more difficult with a lack of growth across the economy. Reacting to the data this week, Shadow Chancellor Rachel Reeves focused on living standards, saying “British people do not need to see these figures today to tell them that the economy is not working.”
Assuming there are no statistical revisions, recession will be the operative word for the UK economy until the next forecast, informing the Chancellor’s priority to exercise spending restraint, without the fiscal headroom to pay for “smart tax cuts.”
Why Does it matter?
Recessions have real, tangible implications. People feel poorer as wages stagnate, prices rise, and government spending is cut back. In that sense, today’s news will not have come as a shock to many across the UK, who have felt their spending power decrease steadily over the past 18 months. This doesn’t mean today’s news doesn’t matter, though. The term “recession” is well understood and cuts through to voters across the country. It will have only enhanced what threatens to become a widespread feeling of malaise with the current government.
For a Prime Minister who has made economic growth the cornerstone of his political agenda, and with a General Election imminent, such a sense of malady heightens the risk for Rishi Sunak. The Labour Party—the UK’s main opposition party—has placed the blame firmly at his door—“Rishi’s recession,” as the Shadow Chancellor dubbed it this week, and “it is the British people who will pay the price.” Reeves also set out an argument that will chime with many voters in the weeks and months to come, and by her admission will be the platform on which the Labour Party will fight the Election—that the UK is “in a spiral of economic decline” with real impacts in the pockets of working people. In this context, the Government’s argument that “we were expecting a much deeper recession than we’ve actually had” will have done little to quell voters’ anguish. In short, it’s hard to escape the fact that the UK economy is now smaller than when Rishi Sunak entered Downing Street in 2022.
A recession also has practical implications for the cost of governing—a perhaps underappreciated point given the impact it will have on UK politics in coming years. As highlighted by Andrew Bailey, Governor of the Bank of England, earlier this week, interest rates are not expected to return to the near-zero levels of pre-pandemic at any point in the near future. Higher long-term interest rates make it more expensive for the Government to roll over its existing debt—which stood at 95.8% of GDP at the end of 2023—and issue new debt. To demonstrate what this reality looks like in practice, the Centre for Policy Studies—a prominent UK center-right think tank—estimates that at current spending levels, the economy will need to grow by 2.9% every single year for the next 50 years if the UK wants to maintain current welfare spending.
Where is it Going?
Taking a step back, today’s news has highlighted what many people across the UK will already have felt: that the UK’s economy is in a period of persistent stagnation. According to the Resolution Foundation, the UK’s GDP is 24% below levels forecasted pre-financial crash.
It is in this climate that the Chancellor is drawing up his forthcoming budget, scheduled for March 6. In what could be the last fiscal event ahead of the election, the Government is keen to include a series of “retail friendly” policies, such as tax cuts, designed to win votes. However, higher borrowing costs and reduced tax revenues, which are driven by a reduction in consumer spending, significantly impede the ability to deliver on this without cutting already stretched public services—a move which itself is unpopular with voters.
Such a trying context also presents issues for the Labour Party. Sir Keir Starmer’s pledge that a Labour Government will secure the highest sustained growth in the G7 has never looked more ambitious. For context, in 2023 the US economy expanded 2.5% compared to the UK’s 0.1%, while the OECD predicts that UK growth will hit 1.2% in 2025, less than Spain, Canada and Australia. Assuming Labour does form the next government, as polls suggest will be the case, the party will face a series of extremely difficult decisions in its efforts to deliver what has the potential to be quite a wide-ranging policy program. If the way the party dealt with its GBP £28 billion “green pledge” is anything to go by (covered in detail below), the political implications of this could be painful for Starmer and co.
In the long term, whichever political party forms the next government, will be faced with a daunting task. The UK requires a long-term strategy targeted at addressing the systemic economic issues curtailing its economic growth, and today’s figures show that designing that strategy is becoming harder, not easier.
Labour U-Turns on Green Fund
Issue
Almost everyone expects Labour to form the new government at some point in the next 12 months. This week’s economic news, then, is both a political opportunity for Labour and a massive challenge to an incoming Labour administration.
Embedded low growth reduces the scope for increasing government revenue. The long-term path for interest rates limits the scope for using government borrowing to support public spending.
In that context, and after many weeks—if not months—of internal discussion Labour finally said that it would not borrow GBP £28 billion a year to fund its “Green Prosperity Plan” and its pledge to decarbonise the energy system by 2030.
This was not just a U-turn in economic policy. It also cut deep into the political fissures that rupture the Shadow Cabinet.
What Does it Mean?
This is “Rishi’s recession,” according to Shadow Chancellor Rachel Reeves. He was proud to have his signature on marketing materials for the Covid furlough scheme. He was proud to have his signature on marketing materials for the Covid furlough scheme. And so, for Labour, the profound economic situation the UK is in, is also clearly his. They want to land the political message directly and sharply: “We are in this mess—your personal finances hurt—because of the choices Rishi Sunak has made.”
That should be a powerfully effective political message for Labour, but their own economic plan has also been torn asunder. It took months of briefing to the papers and semi-public disagreement amongst senior shadow cabinet members before the party finally ditched its borrowing plan.
The “fiscal realists” won out against those who wanted to have a clear green line between them and the Conservative Party.
But the time and political pain it took to come to that decision is revealing. Dithering in office ends political careers and robs prime ministers of authority.
This was a policy made at party conference in 2021—a pledge to energize the party membership in a time when interest rates were close to zero. But it was a pledge that was never going to withstand an election campaign where Labour wanted to grab the mantle of fiscal responsibility. And it was a pledge made 3.5 years before the election was scheduled when no one could realistically forecast the state of public finances. Labour should have set out their policy objectives and said the financing would follow.
Significantly, Labour is now committed to an incredibly ambitious policy objective which few think can be delivered, while neutering the financial commitment that could have made it deliverable.
Dropping the figure—because of the desire to neutralize any threat to fiscal credibility—is just as difficult a policy choice. Many feel they are bending over backwards to pass tests set by the Conservative party—tests they will inevitably never meet.
The whole process shows, perhaps, that Labour’s top politicians—on the brink of power—are out of practice. Government in such straightened economic times will be more difficult than is possible to imagine. It will require creativity, persistence, responsiveness and ruthlessness to define the world in their own terms. The question is: Do they have what’s required?
