In the fourth quarter of 2023, the UK's GDP fell by 0.3% month-on-month, the second consecutive quarter of decline, which is regarded by economists as a "technical recession". High inflation remains the biggest obstacle to UK economic growth. High inflation forces the Bank of England to maintain a high benchmark interest rate, and the current high interest rate is hindering its economic growth. Whether inflation can fall further in the future is full of uncertainty. The Bank of England must strike a balance between the need to slow price increases and the risk of maintaining high interest rates to damage the economy. If interest rates are not cut as soon as possible, the recession may be exacerbated.

Recently, the latest economic data released by the UK National Statistics Office showed that in the fourth quarter of 2023, the UK's gross domestic product (GDP) fell by 0.3% month-on-month, the second consecutive quarter of decline. Although the British government has not officially defined "recession", negative growth for two consecutive quarters has been regarded by economists as a "technical recession". According to the UK National Statistics Office, the UK's GDP will only grow by 0.1% in 2023. Excluding 2020, which was affected by the epidemic, this is the worst economic growth performance since 2009. The data also showed that the UK's per capita GDP has shrunk for seven consecutive quarters, the worst performance since official economic data was recorded in 1955.

According to detailed data from the UK National Statistics Office, in the fourth quarter of 2023, all major economic sectors in the UK declined, among which the weakness in manufacturing, construction and wholesale and retail industries had the greatest drag on economic growth. From the perspective of total economic output, the output of the service sector fell by 0.2% year-on-year in the fourth quarter of 2023, mainly due to the poor performance of food and beverage and wholesale and retail industries; manufacturing output fell by 0.9% year-on-year, of which machinery and equipment manufacturing fell by 7.0% year-on-year, and rubber and plastic products and other non-metallic mineral manufacturing fell by 4.7% year-on-year. In addition, the output of the construction industry fell by 1.3% year-on-year, and the volume of newly started construction projects fell by 5.0%, among which the construction of new commercial housing fell for five consecutive quarters.

From the perspective of total demand, after the UK's real household expenditure fell by 0.9% in the third quarter of 2023, real household expenditure fell further by 0.1% in the fourth quarter. Affected by the long-term rise in prices and the increase in household borrowing costs, the cost of living for British families is relatively high. In the context of the price increase rate exceeding the wage income increase rate, it is difficult for households to improve their expected income, resulting in a decline in residents' overall willingness to consume. Among household expenditures in the fourth quarter of 2023, the largest decline was in entertainment, culture and tourism, and travel service expenditures. At the same time, affected by the wave of medical strikes, government expenditures fell by 0.3% in the fourth quarter of 2023.

In terms of import and export trade, affected by the international environment, the UK's export trade fell by 2.9% in the fourth quarter of 2023, among which the export of services fell significantly, including the export of commercial services such as law, accounting and management consulting, and tourism services. At the same time, the UK's imports of goods and services from China have both declined, and the overall trade deficit accounted for 2.2% of GDP.

British Chancellor of the Exchequer Jamie Hunt recently said that high inflation remains the biggest obstacle to UK economic growth because it forces the Bank of England to maintain a high benchmark interest rate, and the current interest rate level is hindering economic growth. Although the UK inflation rate measured by the Consumer Price Index (CPI) slowed to 4% in January due to the decline in the prices of household goods, food and non-alcoholic beverages, and the core CPI rose by 5.1%, the inflation performance was still far above the 2% target set by the Bank of England. The UK also lags behind other developed economies in reducing inflation, with the inflation rates of the United States and the eurozone at 3.1% and 2.4% respectively during the same period. In addition, it is worth noting that the UK service CPI rose to 6.5% in January. Since the service industry is the core of the UK economy, occupies a large proportion of the UK economy and absorbs many jobs, the slight increase in the service CPI reflects the momentum of wage growth and the imbalance between consumer demand and service product supply. At present, it is full of uncertainty whether inflation will fall further in the future. If the tight supply and demand relationship in the labor market still leads to high wage growth, it will bring potential inflationary pressure. However, there are also market views that at present, the labor market situation has been alleviated, and the improvement of structural contradictions in the labor market and the reduction of wage pressure will provide a good foundation for further controlling inflation.

Market analysis believes that the degree of this economic "recession" is mild, but it also confirms that the British economy is still in a cycle of continued stagnation in 2023 and has not stepped out of the shadow of "stagflation". At the same time, there are also more positive market views that at present, the UK's employment continues to improve, real wage increases, and business and consumer confidence indicators will recover before the end of 2023, and we should not be too pessimistic about the continuous negative growth in the second half of 2023. Andrew Bailey, Governor of the Bank of England, recently downplayed the importance of GDP data in the fourth quarter of 2023, suggesting that signs of economic improvement will become more obvious in the coming months. Jamie Hunt also said that there are signs that the British economy is improving, and although many families are still having a hard time, tax cuts must be adhered to.

The Office for Budget Responsibility (OBR) in the UK remains cautious about the economic outlook. According to its report released in November 2023, the poor economic outlook in the UK is the result of multiple factors such as weak real wage growth, the impact of past rapid interest rate hikes, and weakening fiscal support. The OBR believes that the policy impact of the past sharp interest rate hikes has not yet been fully released, and its negative effects have only been released by about half. The increase in the number of fixed-rate mortgages in the past few years has delayed the impact of interest rate hikes on the disposable income of many households. According to data from UK Finance, the British Banking and Financial Services Association, about 1.6 million fixed-rate mortgages will expire in 2024. The mortgage interest rates corresponding to the current high bank interest rate level will increase the debt burden of residents, affect household disposable income, and further weaken household consumption willingness.

Earlier, after the news that the UK inflation rate remained at 4.0% in January was announced, investors re-predicted whether the Bank of England would start to cut interest rates in June this year. At present, the momentum of wage growth for workers has not been fundamentally improved, which makes the Bank of England cautious about cutting interest rates. The Bank of England expects that in May this year, the UK inflation rate will fall below 2% for the first time since 2021, but due to the strong growth momentum of wages in the UK, the inflation rate may rise again to above 2% after bottoming out in May. Andrew Bailey said that although there are some signs of improvement in the UK economy, he still hopes to see more evidence that inflationary pressures are weakening, especially the fundamental reversal of the momentum of wage increases. Jamie Hunt recently expressed the hope that the Bank of England will be able to start cutting borrowing costs before early summer to support economic recovery. Andy Haldane, former chief economist of the Bank of England, recently warned that the Bank of England must strike a balance between the need to slow price increases and the risk of maintaining high interest rates that damage the economy. If interest rates are not cut quickly, the recession in the UK economy may be exacerbated.

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