UK Economy Falls Into Recession, Adding To Sunak's Election Challenge

• Britain's economy fell into a recession in the second half of 2023, a tough backdrop ahead of this year's expected election for Prime Minister Rishi Sunak, who has promised to boost growth.
• Gross domestic product (GDP) contracted by 0.3% in the three months to December, having shrunk by 0.1% between July and September, official data showed. The fourth-quarter contraction was deeper than all economists' estimates in a Reuters poll, which had pointed to a 0.1% decline.
• Thursday's data means Britain joins Japan among the Group of Seven advanced economies in a recession, although it is likely to be short-lived and shallow by historical standards. Canada has yet to report GDP data for the fourth quarter. Britain's economy stands just 1% higher than its level in late 2019 before the COVID-19 pandemic struck, with only Germany among G7 countries faring worse.
• Ruth Gregory, deputy chief UK economist at Capital Economics, said the GDP figures had more political significance than economic, with voters due to elect lawmakers in two constituencies on Thursday. "The news that the UK slipped into technical recession in 2023 will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections," Gregory said.
• Of note, data on Wednesday showed inflation held at a lower-than-expected 4.0% in January, reviving talk among investors about a BoE rate cut as soon as June. However, strong wage growth reported on Tuesday underscored why the BoE remains cautious. Investors were pricing a roughly 68% chance of a first BoE rate cut at its June meeting.

(Source: Reuters)