The Office for National Statistics announced last week that the economy contracted by 0.3 per cent in the final quarter of 2023 after a 0.1 per cent fall in the third quarter. These two consecutive quarters of negative growth mean the UK fell into a technical recession in the second half of last year.
Much of the commentary in recent days has highlighted the likelihood that this will be a short and shallow recession. Indeed, the labour market remains strong, with an unemployment rate of 3.8 per cent and 932,000 job vacancies. Leading indicators, such as consumer confidence surveys, are showing positive signs. The UK economy is unlikely to be on track for anything like the carnage of previous recessions, such as the 2008 financial crisis.
That does not, however, mean the news has no immediate or longer term policy implications.
To start, the primary reason for the slump is higher interest rates to fight inflation. This was necessary but appears to have been overdone in recent months. The Bank of England has ignored the warning signs about the slowdown in monetary growth, instead opting to maintain higher rates. According to the IEA's Shadow Monetary Policy Committee, the low growth and falling inflation should mean an earlier rate cut.
The recession news also comes as the Chancellor is formulating the March Budget. The reports this week have not been reassuring for low tax advocates. Lower growth and higher borrowing costs for the government are expected to mean less ‘headroom’ for tax cuts. Plans to cut income tax or abolish inheritance tax appear less likely to come to fruition.
But this doesn’t mean tax cuts can or should be entirely ruled out. It is absurd that the government's fiscal policy is being determined by week-to-week changes in Office for Budget Responsibility forecasts based on fluctuating bond yields. This hardly feels like a serious way to manage the nation's finances. The government has got itself in this mess — despite the desperate need to get down the UK’s historically high taxes — because of an unwillingness to make difficult, potentially unpopular decisions on spending.
Ultimately, what matters is not whether the economy slightly shrunk in the second half of last year but that it has barely grown for the past 15 years. In other words, the economy may not be crashing, but it continues to stagnate.
The challenge for the government – and opposition – is to explain what can be done to jumpstart entrepreneurial activity, attract investment and get people working more productively. A pro-growth agenda could not be more important.
