16 January 2024
The 0.3% month-on-month rise in GDP in November cancels out the equivalent fall in October. So, whether we are in a recession or not now hangs on what happened in December. Flat or rising GDP at the end of last year should be enough to ensure that growth in Q4 as a whole is zero rather than negative. This would mean the UK avoided a technical recession by the narrowest margin possible.
However, it’s entirely possible GDP contracted in December. Output was boosted in November by one off factors like fewer strikes and a recovery from storm Babet - these won't have been repeated in December. But consumer spending seems to have picked up, which should help consumer facing services.
All in, it's probably a 50:50 chance as to whether there was a recession last year. The Monetary Policy Committee (MPC) will probably wait until the middle of this year before it starts to cut interest rates starting in May or June. But if the economy does fall into recession, then it would give the MPC the cover it needs to cut interest rates earlier.
The good news is that even if there was a recession it would be the mildest on record and is probably already over, or at least soon will be. Indeed, the RSM UK Middle Market Business Index is still pointing to resilience at the end of last year. Even though the economy will remain weak in Q1 this year, things should start looking up in the spring and summer as inflation falls, interest rates start to follow suit and taxes are cut.
Behind the data
Growth in November was concentrated in the services industry, which grew by 0.4% following a rebound in the IT sector. We already knew that retail sales had a strong month in November and that boosted GDP by 0.05%. Output in consumer-facing services grew by 0.6%, suggesting that consumers still seem to be prioritising spending on experiences. The manufacturing sector grew by 0.4% due to strong growth in the pharmaceutical sector, but wet weather held back construction, which dropped by another 0.2%.
High interest rates will continue to put a dampener on economic growth, and inflation, although falling, remains much higher than the 2% target. A continued stagnation seems the most likely path over the next six months.
However, things look brighter in the second half of this year. The inflation rate will probably start with 2%, which would allow the Bank of England to start cutting interest rates. At the same time, real earnings growth will continue to rise and there is the distinct possibility of further tax cuts coming in March. All this would mean more consumer spending, higher business confidence and – finally – a return to some decent economic growth.
We doubt the pick-up in the economy will prevent the Bank of England from easing. Inflation is likely to fall below 2% by the spring, materially reducing the upside risks to inflation expectations. We see a first-rate reduction in May or June and a cumulative 75 basis points of cuts in 2024. That would take the policy rate to 4.5% by year-end.