UK recession dwell: Reeves says Britain trapped in cycle of ‘decline’ as Sunak’s financial system pledge ‘in tatters’

Welcome to our dwell weblog on the UK financial system.

The UK is believed to have slipped into recession on the finish of final yr after a weak December for the nation’s financial system, official figures are set to point out.

The Workplace for Nationwide Statistics (ONS) is predicted to disclose that the UK financial system contracted for the second quarter in a row within the remaining three months of 2023.

Most economists are forecasting a 0.1% decline in gross home product (GDP) between October and December.

This could observe a 0.1% contraction within the earlier three months, after a downward revision in opposition to the zero progress initially estimated.

A contraction within the fourth quarter would imply the UK tipped right into a technical recession, as outlined by two or extra quarters in a row of falling GDP.

The Financial institution of England has held rates of interest at 5.25% 4 instances in a row.

Official figures for the fourth quarter of final yr are additionally anticipated to point out that the financial system was weak final yr as a complete.

ONS estimates recommend it didn’t develop in any respect between April and June, earlier than shrinking between July and September, which has left the UK liable to recession within the remaining three months.

Financial institution of England governor Andrew Bailey has signalled {that a} recession, if confirmed, can be more likely to be transient, telling a Lords committee on Wednesday the financial system was starting to choose up.

Mr Bailey advised the Home of Lords Financial Affairs Committee: “In our February Financial Coverage Report, it was within the stability – we didn’t have a recession within the forecast, however it’s at finest flat, within the view we took.

“It wouldn’t take a lot to tip it both method, frankly.

“Going ahead – and I feel that is in some methods extra important – we are actually seeing some indicators of the start of a pick-up in a number of the surveys, as an illustration … we’ve bought a modest pick-up this yr which continues thereafter.”

UK inflation defied expectations to carry regular at 4% in January as decrease meals costs helped offset will increase in vitality prices, official figures present. Economists had anticipated an increase to 4.2%:

Employees are more likely to begin feeling higher off regardless of a short-lived recession, say specialists.

Ellie Henderson, an economist at Investec mentioned: “Our base case is that the financial system most likely did tip right into a recession, though this may be within the mildest of senses: a greater description of the pattern is perhaps stagnation.”

Investec is pencilling in a 0.1% contraction within the fourth quarter, with weak retail knowledge dragging on the all-important companies sector and resulting in a 0.3% fall in output in December.

Ms Henderson added: “In all, we count on that it was a troublesome finish to the yr for the UK financial system, however 2024 is more likely to have gotten off to a greater begin as family budgets look to have loosened just a little.

“Certainly, the decline in inflation mixed with nonetheless excessive wage progress will proceed to drive actual family disposable incomes increased, a key issue behind the anticipated restoration this yr.

“There may also be the added elevate to post-tax incomes from the 2p lower to workers’ Nationwide Insurance coverage Contributions, efficient from January 6 – and, in all probability, extra to come back within the March Funds.”

Shares in London soared on Wednesday after new official inflation figures had been decrease than economists had anticipated, rising the possibility of a Financial institution of England price lower in months to come back.

The FTSE-100 rose 56.12 factors, or 0.75%, ending the day at 7,568.4, as retailers and housebuilder Persimmon joined the bottler of Coca-Cola near the highest of the index.

The inflation price was 4% in January, the identical because the month earlier than, however merchants celebrated as a result of economists had anticipated an increase to 4.2%.

“The previous 24 hours have been filled with surprises, and this morning’s UK inflation knowledge actually caught markets on the hop,” mentioned Chris Beauchamp, chief market analyst at on-line buying and selling platform IG.

“Fast deceleration in value progress has hit the pound laborious, because it appears a Financial institution of England price lower has grow to be a more likely occasion within the first half of the yr.

“This has helped the FTSE-100 to outperform different indices at the moment, although after all it lags far behind on a longer-term view.”

A technical recession might additional add to the case for an rate of interest lower, with the Financial institution of England already indicating it’s extra a case of when, not if, a discount will come.

Financial institution of England governor Andrew Bailey mentioned that inflation remaining unchanged “leaves us broadly the place we thought we had been going to be”.

Requested whether or not he thought the UK might be caught with inflation at its present 4% stage, he reiterated that the speed was anticipated to return to the two% goal by the spring, in line with its personal forecasts.

“It appears to be like like we’re going to have fairly a leg down between now and April-Could time,” he mentioned.