The UK economy contracted by 0.5% month-on-month in December, according to data published by the Office for National Statistics (ONS) on Friday. This marked a return to contraction, following month-on-month growth in October and November. Output was stagnant across Q4 as a whole, relative to Q3. As such, the economy avoided a technical recession in the second half of last year. Across the entirety of 2022, output is estimated to have grown by 4.0%, down from 7.6% growth in 2021.

December’s month-on-month contraction was predominantly driven by the services sector, which saw a 0.8% decline in output. The sector has been adversely impacted by living cost pressures recently, with consumer activity being weaker amidst elevated inflation and a shortfall in earnings growth, resulting in muted demand. This trend continued in December, and so contributed to the monthly decline. 

Yet this was not the only factor behind the fall in service sector output, with December’s wave of industrial action also having an effect. The direct impact of the strikes was evident in output data for rail transport and postal and courier activities, however, there were a range of spillover effects in other sectors. For instance, human health and social work activities was the largest driver of the fall in services output in December, declining by 2.8% during the month. 

A portion of this decline can be attributed to the strikes, which reduced patients’ ability to attend appointments and held back wider operations in the sector. Though the ONS could not isolate the impact of the strikes from broader economic headwinds, Cebr estimates that industrial unrest cost the economy at least £1.7 billion in the eight months to January 2023.

Despite the contraction in December, the economy avoided a decline across Q4 as a whole, being supported by growth earlier in the quarter. Output had increased by 0.5% in October and a weaker 0.1% in November prior to December’s contraction. Having experienced a quarterly contraction of 0.2% in Q3, the stagnation in Q4 meant that the economy avoided a technical recession across the second half of 2022. On a sectoral basis, output was flat in services, while there was growth of 0.3% in construction. This was offset by a 0.2% decline in the production sector, which was impacted by continued supply chain pressures. Aggregate output remained 0.8% short of Q4 2019 levels, the final pre-pandemic quarter.

Though a technical recession was avoided in 2022, the wider pressures facing the economy have not dissipated. On the consumer side, households are still suffering from weaker living standards amidst continually elevated inflation, while businesses are struggling from a range of headwinds, including supply chain issues, energy costs, and general uncertainty.

The Bank of England’s course of monetary tightening is also slowing output by raising the cost of borrowing, discouraging investment, and encouraging saving. Combining all these factors, the economy is expected to return to contraction in the early months of 2023, experiencing a recession across Q1 and Q2. For 2023 as a whole, Cebr expects the UK economy to contract by 1.3%.

Sam Miley is a senior economist at the Centre for Economics and Business Research.

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