The latest economic data from the Office of National Statistics (ONS) showed that the economy ended 2023 on a weak note. Gross Domestic Product (GDP) grew by just 0.1 percent compared to 2022. Excluding the pandemic-induced recession of 2020, this was the slowest increase since 2009.

The quarterly data was more noteworthy with the contraction of 0.3 percent in Q4 2023 GDP, following the 0.1 percent fall in Q3 2023 thus satisfying the definition of a ‘technical recession’ – two consecutive quarters of negative GDP growth.

ONS revealed that output in all three broad sectors fell in 2023 Q4. Services were down 0.2 percent quarter on quarter. construction fell by 1.31 percent and industrial production by one percent in the same period. High-interest rates and stretched earnings explain the fall in consumer spending – which accounts for 60.0 percent of total GDP – in both Q3 and Q4 2023. The services sector contracted for a third consecutive quarter, the longest period of weakness in the sector since 2008.

Despite the surge in interest rates and inflation, the UK economy has so far remained resilient, while high unemployment and a severe housing downturn have been avoided. This does not feel like a typical recession. In fact, the consensus is for a mild and short-lived downturn, with the economy expected to grow by 0.4 percent in 2024 and 1.4 percent in 2025.

The February Standard & Poor (S&P) Global Purchasing Manager Index (PMI) suggests that business leaders are feeling more positive in their economic outlook. Much of this sentiment rests on inflation continuing to fall with expectations of interest rate cuts. The continued strength of the jobs market should support the economy as well.

Of course, risks do remain that could prolong the recession, for example, if wage growth remains strong then interest rates could remain higher for longer. Alternatively, geopolitical tensions could disrupt supply chains, leading to delays and higher shipping costs.

The January 2024 inflation rate remained at four percent, the same as in December 2023. Core inflation, which excludes food and energy prices, remained at 5.1 percent, although services inflation did nudge up for the second month in a row, from 6.4 percent to 6.5 percent.

As services inflation is a good indicator of domestic inflationary pressures, the Bank of England will be following this measure closely as it makes future decisions on interest rates.

Nonetheless, the consensus view is that inflation is expected to continue its descent and hit the Bank of England’s two percent target in early Spring this year. In early March, the OBR forecast that Consumer Price Index inflation would fall to two percent by Q2 2024, a year earlier than it predicted last November. These forecasts have been bolstered by Ofgem’s recent announcement of a significant cut in the energy price cap for the second quarter of 2024.

Financial markets are forecasting interest rates will be cut by 0.25 percentage points in May 2024 and will fall to around 4.5 percent by the end of 2024 – unless inflation remains stickier.