UK fell into recession at the end of 2023 as economy takes center stage in runup to general election

LONDON (AP) — The British economy fell into recession at the end of 2023 for the first time since the onset of the coronavirus pandemic, as output shrank more than anticipated in the final three months of the year, official figures showed Thursday.

In what is a blow for the governing Conservative Party ahead of a general election this year, the Office for National Statistics estimated that economic activity, as measured by gross domestic product, declined by 0.3% in the fourth quarter of the year from the previous three-month period. It said all three main sectors — services, industrial production and construction — were down.

That was far more than the 0.1% decline anticipated by economists.

The quarterly decline followed a 0.1% fall in the previous three-month period and highlights how the economy has been hobbled by high interest rates that have been raised to reduce inflation.

A recession is officially defined as two straight quarters of economic decline.

It is the first time the British economy has fallen into recession since the first half of 2020, when output dived during the country's first COVID-19 lockdown.

Being in recession — however modest — is hardly the ideal backdrop for Prime Minister Rishi Sunak as he mulls when to call the election. Opinion polls show that his Conservative Party is heavily trailing the main opposition Labour Party.

Treasury chief Jeremy Hunt blamed high inflation for the weakness of the economy, which has eaten into living standards.

“Low growth is not a surprise,” he said. "Although times are still tough for many families, we must stick to the plan — cutting taxes on work and business to build a stronger economy.”

In a budget statement next month, Hunt is expected to try to turn the political momentum back for the Conservatives by cutting taxes, though with public finances stretched, government spending may have to be trimmed too.

Rachel Reeves, who would replace Hunt at the Treasury if Labour wins the election, sought to point the finger directly at Sunak and “14 years of economic decline” under the Conservatives.

“This is Rishi’s recession and it is the British people who will pay the price," she said.

One of the main reasons why the economy has stagnated is that the Bank of England has raised its main interest rate aggressively to a 16-year high of 5.25% to get inflation down to 4% from a peak of over 11%. Higher interest rates help cool the economy by making it more expensive to borrow, thereby bearing down on spending.

Though interest rates appear to have peaked, the central bank has expressed caution about cutting interest rates too soon as lower borrowing rates may bolster spending and put renewed upward pressure on prices. As a result, borrowing costs are expected to stay high, relative to the past 15 years or so, and growth muted, whenever the election comes.

“The big picture is that Britain remains a stagnation nation, and that there are precious few signs of a recovery that will get the economy out of it," said James Smith, research director at the Resolution Foundation think tank.