Britain enters recession: how worried should we be?

Britain has entered recession. 

It’s a dreaded moment for Rishi Sunak who made “growing the economy” one of his five key pledges. The shadow chancellor has wasted no time in reminding him. “The Prime Minister’s promise is in tatters,” declared Rachel Reeves.

Just how worried should we be? 

First, a reminder of what the term actually means: the economy enters a recession when it shrinks for two successive quarters. New GDP figures from the ONS confirmed that the economy shrunk by a larger-than-expected 0.3 per cent in the final three months of 2023, after it had already contracted between July and September.

Worrying or otherwise, the development is not a shock. 

Raising interest rates to curb inflation inevitably means the economy slows down. “Tackling inflation had to come first,” insisted chancellor Jeremy Hunt today. 

Yesterday’s new inflation data was indeed much more encouraging than today’s GDP figures. The rate at which prices rose was lower than expected in January at 4 per cent, while monthly food prices fell for the first time in over two years. 

We should also put today’s GDP figures into context. During the recession in the 1980s, the economy shrank by 2.1 per cent. Following the financial crash in 2008, it shrank by 4.6 per cent. Hence why economists are labelling our current conundrum a mild recession. 

These past recessions were also characterised by mass redundancies. This time round, the labour market remains strong. Unemployment remains near historic lows, with figures released only this week showing there are almost a million job vacancies in Britain. 

That said, historical comparisons also show that, while the current recession may be shallow, the wider economic picture of stagnation over the last two decades is depressing. The last twenty years has seen growth of just 0.7 per cent in UK GDP per head – 70 per cent lower than the rate of the previous four decades.

Most economists predict that the recession Britain has now slipped into will be not only shallow but short too.

Nevertheless, today’s gloomy economic news paired the with more positive inflation data yesterday does prompt the question: is it time to start cutting high interest rates – currently held at 5.25 per cent – before they do irretrievable damage to the economy? 

Maggie Pagano writes in Reaction that the Bank of England should take heed of the warning from Andy Haldane, its wise former top economist, who has been ahead of the inflationary curve since early 2020. Haldane was vindicated after arguing early on that the Bank was being too slow to start raising rates. This week, he issued a new warning: the Bank is in danger of being too slow to cut them. 

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