Why it matters: Little or no economic growth.
British Prime Minister Rishi Sunak pledged to grow the economy last year as one of five promises he wanted voters to make. Instead, the economy slipped into recession. (Two consecutive quarters of economic decline is usually considered a recession, although other factors such as the depth of the decline and job losses are also important factors.) Overall, in 2023 the economy grew just 0.1 percent compared to 2022.
While Thursday’s figures are subject to revision as more information is gathered about the economy, they paint the picture that Britain, like the euro zone, saw little or no growth for much of the past year. By some measures, these weak data can look optimistic. Europe’s economies, including Britain’s, have proved more resilient than expected, averting the most dire warnings of a recession in early 2023.
The lackluster economy has proven to be a further challenge for households and businesses facing relatively high costs and rising loan repayments. And it’s in contrast to the United States, where economic growth has soared, with economies on either side of the Atlantic diverging as they try to put the recent period of high inflation firmly behind them.
Other economic data: Inflation remained at 4% in January.
Thursday’s GDP report was the last of a trio of key economic data on the British economy released this week. On Tuesday, the country’s statistics office reinstated official estimates of unemployment and other labor market measures after a four-month hiatus due to data collection difficulties. It showed the labor market was tighter than previously thought, with the unemployment rate at 3.8% at the end of last year. Wage growth was about 6 percent.
On Wednesday, separate data showed that inflation remained at 4% in January, the same as the previous month but close to a two-year low. The increase in the cap on household energy bills offset the slowdown in food inflation and the price of furniture and other household items.
Key question: When will interest rates come down?
Despite stubborn inflation last month, it slowed in Britain faster than the Bank of England expected. And given anemic economic growth, investors are betting that interest rates will be cut in the spring.
Andrew Bailey, the central bank’s governor, has said he does not want to keep interest rates high for longer than necessary, but policymakers are also wary of prematurely suggesting that inflation has been beaten. In particular, the central bank is looking for a further slowdown in wage growth.
It is expected to be a somewhat bumpy road to a sustainable return of inflation to the central bank’s 2% target. The challenge presented itself on Tuesday in the United States, when inflation fell less than economists had expected and traders quickly pulled back their bets on how soon rate cuts would come.
What’s next: Election year.
This year is expected to be another year of low growth in Britain. The ruling Conservative Party plans to announce more tax cuts next month as part of a strategy to ignite economic growth ahead of this year’s general election.
But many economists argue that Britain does not need tax cuts to stimulate the economy. They are calling for investment in public infrastructure and services, including schools and health services, and reforms to the planning system to promote the green transition and build more homes.
