- Next week’s data is expected to confirm that the economy is out of recession
- But can it stay that way?
Next Friday, first quarter gross domestic product (GDP) figures will be released. Taken in isolation, they will probably look relatively underwhelming: economists at KPMG expect 0.3 per cent growth over the quarter. But context is everything. The UK economy contracted by 0.1 per cent in Q3 of last year, and by 0.3 per cent in Q4. This means that next week’s figures should bring an end to a run of two consecutive quarters of negative growth, meaning the end of our “technical” recession.
Where the UK economy is recovering
Surveys suggest that confidence is rising as National Insurance cuts and wage gains are starting to boost real household incomes again. There are also indications that the housing market is starting to recover thanks to the dip in mortgage rates since last summer. This year’s early Easter should also boost first-quarter figures, with the bank holiday lifting activity – particularly in retail.
Despite this cause for optimism, economists at KPMG expect that the UK’s growth potential will be limited this year. They think that uncertainty in the run-up to the election could dent confidence, particularly when it comes to business investment. The longer-run outlook is also challenging. The International Monetary Fund (IMF) expects the UK economy to grow just 0.5 per cent over the course of 2024, far below the average for advanced economies, and firmly below full capacity. Suren Thiru, chief economist at the ICAEW, said that although “recession concerns are disappearing into the rear-view mirror, the longer-term outlook is still difficult”.
Can we stay out of recession?
If it really is already over, the 2023 contraction will register as the shallowest and shortest UK recession on record. While good news, it could also make our recovery feel unusual. As the chart below shows, GDP growth has been extremely sluggish since the pandemic, and looks set to remain low by historical standards. Adjusted for population growth, things look even more underwhelming. GDP per head fell by 0.7 per cent across the whole of 2023, and remains lower than its pre Covid levels. Households could be disappointed to find that a very mild recession and a very mild recovery both feel a lot like stagnation this year.
It is also worth flagging that when the margins are this fine, data revisions can have a huge impact. Research by the Office for National Statistics (ONS) shows that revisions of 0.3 percentage points are not uncommon, while the focus on "technical" recessions leads to there being heightened sensitivity to a revision around turning points. A recession in 2011-12 was subsequently revised away, as were references to a ‘double-dip’ recession. As a result, confirming the end of the recession could be a frustratingly gradual process.
Better GDP data could mean later rate cuts
The margins could be fine when it comes to rate cuts, too. Investec economist Philip Shaw points out that GDP growth of 0.1 per cent month on month might sound like the economy has stalled, but is equivalent to 1.2 per cent in annualised terms. Though still low, this is very close to the UK’s estimated trend rate of growth – the average sustainable rate of growth over time.
Shaw still expects a first rate cut in the summer, but sees some risk that demand gathers momentum over the next few months, “resulting in the Monetary Policy Committee adopting a more cautious approach and delaying its first rate cuts into the second half of the year”. After February’s GDP figures were released, the ICAEW’s Thiru said that strong figures could give “those rate setters still concerned about persistent price pressures sufficient reassurance on the economy to keep interest rates higher for longer than many expect”.
Markets are currently pricing in two quarter-point rate cuts over the course of 2024. But if the past few months have taught us anything, it’s that buoyant economic data can rapidly dash rate cut hopes.
