UK economy falls into recession after public spending cuts take effect towards closing stages of 2023

February 19, 2024

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UK economy falls into recession after public spending cuts take effect towards closing stages of 2023

The UK's economy fell into recession in late 2023, with two consecutive quarters of contraction, reflecting a concerning trend. 

The larger-than-expected 0.3% contraction between October and December, following a previous contraction between July and September, underscores the challenges faced by the economy.

Rishi Sunak's pledge to grow the economy has come under scrutiny in light of these figures, as the economy's performance has fallen short of expectations. Despite a modest annual growth of 0.1% for 2023, it remains the weakest figure since the aftermath of the 2008 global financial crisis.

The situation in the UK is not isolated, as other major economies, such as the European Union and Japan, have also experienced economic pressures. Factors contributing to the UK's economic downturn include reduced consumer spending, strike action in the health sector, and lower school attendance rates.

The Office for National Statistics (ONS) highlights a slowdown across various sectors, including construction and manufacturing, indicating a broad-based economic weakness. Moreover, forecasts for public finances have worsened due to increased interest costs on government borrowing.

The Bank of England's decision to maintain interest rates at 5.25% since August suggests a cautious approach to managing inflationary pressures amidst the economic slowdown.

Overall, these developments underscore the need for careful economic management and potential policy adjustments to stimulate growth and address the challenges facing the UK economy.

US inflation slows by less than expected

Price increases in the US moderated last month but not as much as expected, as higher housing and food costs offset a decline in petrol prices.

The latest report from the Labor Department indicates that price increases in the US moderated slightly but not as much as expected in the previous month. 

Despite a decline in petrol prices, higher housing and food costs offset these declines. Annual inflation, measured at 3.1%, was lower than the previous month's 3.4% but still higher than the anticipated 2.9%.

This data suggests that authorities are still grappling with inflationary pressures, as inflation remains elevated. The news of inflation not falling as much as expected led to a downturn in US financial markets, dispelling hopes of early interest rate cuts by the US central bank to address the issue.

Although inflation spiked significantly in June 2022 due to factors like surging oil prices amid the Ukraine conflict, many of the initial supply chain disruptions have improved, and demand has moderated since then, partly in response to the Federal Reserve's tightening of borrowing costs. However, price increases, particularly for services, continue to persist.

These ongoing price rises have had a tangible impact on incomes and have contributed to dissatisfaction among voters, especially in the lead-up to the presidential election in November. 

While some areas like grocery prices saw more modest increases, other sectors such as restaurant prices, car insurance, and personal care experienced significant jumps in costs.

The core inflation rate, which excludes volatile food and energy prices, remained unchanged at 3.9%, indicating that underlying inflationary pressures persist across the economy.

Japan’s economy unexpectedly slips into recession, as weak domestic demand takes hold

The latest provisional government data reveals that Japan's economy slipped into a technical recession, experiencing unexpected contraction once again in the October-December period. 

High inflation has constrained domestic demand and private consumption in what is now the world's fourth-largest economy. 

This development presents challenges for both Bank of Japan Governor Kazuo Ueda, who is considering interest rate normalisation, and Japanese Prime Minister Fumio Kishida, who may need to reassess fiscal policy support.

The fourth-quarter contraction of 0.4% compared to a year ago, following a revised 3.3% slump in the July-September period, was well below economists' expectations.

Additionally, the GDP deflator stood at 3.8% on an annualised basis for the fourth quarter. The economy also shrank 0.1% in the fourth quarter compared to the previous quarter, further below expectations for expansion.

Private consumption, a significant driver of economic activity, declined 0.2% in the fourth quarter compared to the previous quarter, contrary to expectations for expansion.

Although inflation has been gradually decelerating, "core core inflation," which excludes food and energy prices, has surpassed the BOJ's 2% target for 15 consecutive months. Despite this, the BOJ has maintained its negative-rate regime, hoping that sustained wage growth would stimulate consumer spending.

However, the weaker-than-expected GDP data calls into question the BOJ's strategy of relying on domestic demand-driven inflation. Many market observers anticipate the BOJ may abandon its negative rates regime at its April policy meeting, particularly if the annual spring wage negotiations indicate significant wage increases. 

Yet, the persistent high inflation and its impact on domestic consumption may strengthen the case for maintaining looser monetary policy for an extended period.

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