In the fourth quarter of 2023, UK GDP fell by 0.3% quarter-on-quarter, marking the second consecutive quarter of decline and considered a "technical recession" by economists.

High inflation remains the biggest obstacle to UK economic growth.

High inflation has forced the Bank of England to keep its benchmark interest rate high, and current high interest rates are hampering 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 down price increases and the risk of damaging the economy by maintaining high interest rates. Failure to cut interest rates soon may exacerbate the economic recession.

　　Recently, the British Office for National Statistics released the latest economic data showing that in the fourth quarter of 2023, the British gross domestic product (GDP) fell by 0.3% quarter-on-quarter, marking the second consecutive quarter of decline.

Although the British government has not officially defined a "recession", two consecutive quarters of negative growth have been regarded by economists as a "technical recession."

According to calculations by the British Office for National Statistics, British GDP will only grow by 0.1% in 2023. Excluding 2020, which is affected by the epidemic, this is the worst economic growth performance since 2009.

The data also shows that Britain's per capita GDP has shrunk for seven consecutive quarters, the worst performance since official economic data were recorded in 1955.

　　According to detailed data from the British Office of National Statistics, in the fourth quarter of 2023, all major British economic industries declined. Among them, the weakness of the 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 the food and beverage and wholesale and retail industries; manufacturing output fell by 0.9% year-on-year, among which the machinery and equipment manufacturing industry A year-on-year decrease of 7.0%, and the manufacturing industry of rubber and plastic products and other non-metallic minerals decreased by 4.7% year-on-year.

In addition, the output of the construction industry fell by 1.3% year-on-year, and the number of new construction projects fell by 5.0%. Among them, the number of new commercial housing construction starts fell for five consecutive quarters.

　　From an aggregate demand perspective, following a 0.9% drop in UK real household spending in the third quarter of 2023, real household spending fell further by 0.1% in the fourth quarter.

The cost of living for British households is higher due to long-term price increases and rising household borrowing costs.

With prices rising faster than wage income, it is difficult for households to expect their income to improve, leading to a decline in residents' overall willingness to consume.

Among household expenditures in the fourth quarter of 2023, the largest declines were in entertainment, culture and tourism, and travel service expenditures.

At the same time, affected by medical strikes and other factors, government expenditures fell by 0.3% in the fourth quarter of 2023.

　　In terms of import and export trade, affected by the international environment, British export trade fell by 2.9% in the fourth quarter of 2023. Among them, service industry exports declined significantly, including exports of business services such as legal, accounting, and management consulting, and tourism services. .

At the same time, the UK’s domestic imports of goods and services have declined, with the overall trade deficit accounting for 2.2% of GDP.

　　British Finance Minister Jamie Hunt recently stated that high inflation remains the biggest obstacle to British economic growth because it forces the Bank of England to maintain high benchmark interest rates, and current interest rate levels are hindering economic growth.

Although UK inflation as measured by the Consumer Price Index (CPI) slowed to 4% in January due to lower prices for household goods, food and non-alcoholic beverages, with core CPI rising at 5.1%, inflation still far outperformed the Bank of England 2% target set.

The UK also lags behind other advanced economies in reducing inflation, with US and Eurozone inflation rates at 3.1% and 2.4% respectively over the same period.

In addition, it is worth noting that the UK service industry CPI rose to 6.5% in January.

Since the service industry is the core of the British economy, accounting for a large proportion of the British economy and absorbing many jobs, the slight increase in the service industry CPI reflects that the wage growth momentum and the imbalance between consumer demand and the supply of service products still exist.

At present, it is full of uncertainty whether inflation will further decline 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, some market views believe that at present, the labor market situation has been eased, and the improvement of structural contradictions in the labor market and the weakening of wage upward pressure will provide a good foundation for further controlling inflation.

　　Market analysts believe that the degree of this economic "recession" is mild, but it also confirms that the British economy will still be in a cycle of continued stagnation in 2023 and has not emerged from the shadow of "stagflation."

At the same time, there are also more positive market views that at present, British employment continues to improve, real wages rise, and business and consumer confidence indicators will recover before the end of 2023, and we should not be too pessimistic about continuous negative growth in the second half of 2023.

Bank of England Governor Andrew Bailey recently downplayed the importance of GDP data for the fourth quarter of 2023, suggesting that signs of economic improvement will become more apparent in the coming months.

Jamie Hunt also said that there are signs that the British economy is improving, and although life is still difficult for many families, tax cuts must be adhered to.

　　The UK Office for Budget Responsibility (OBR) remains cautious about the economic outlook.

According to its report released in November 2023, the poor economic outlook for the UK is the result of multiple factors including weak real wage growth, the impact of past rapid interest rate hike policies, and weakening fiscal support.

OBR believes that the policy impact of significant interest rate hikes in the past has not been fully released, and only half of its negative effects have been released.

The increase in the number of fixed-rate mortgages over the past few years has delayed the impact of interest rate increases on the disposable income of many households.

According to data from UK Finance, the British Banking and Financial Services Association, approximately 1.6 million fixed-rate mortgages will mature in 2024. The residential mortgage interest rates corresponding to the current high bank interest rates will increase residents’ debt burden and affect household disposable income. Further weakening household consumption willingness.

　　Previously, after the news that the British inflation rate remained at 4.0% in January, investors re-predicted whether the Bank of England would start cutting interest rates in June this year.

At present, the momentum of labor wage growth has not fundamentally improved, which makes the Bank of England cautious about cutting interest rates.

The Bank of England expects UK inflation to fall below 2% in May for the first time since 2021, but due to strong wage growth in the UK, inflation may climb above 2% again after bottoming out in May.

Andrew Bailey said that although the British economy is showing some signs of improvement, he still hopes to see more evidence that inflationary pressures are weakening, especially that the momentum of wage increases has been fundamentally reversed.

Jamie Hunt recently expressed hope that the Bank of England can start cutting borrowing costs before early summer to provide support for economic recovery.

Andy Haldane, the former chief economist of the Bank of England, recently warned that the Bank of England must strike a balance between the need to slow down price increases and the risk of damaging the economy by maintaining high interest rates. Failure to cut interest rates as soon as possible may exacerbate the situation in the UK. Economic recession.

　　Ma Pianyu

Ma Pianyu