The UK’s recession is another setback for Rishi Sunak’s economic promises

In the second half of 2023, the UK had a slight recession, demonstrating that Prime Minister Rishi Sunak has not yet fulfilled his promise to expand the economy.

The fourth quarter’s 0.3% decline in the GDP exceeded the 0.1% decline predicted by experts, according to data published on Thursday by the Office for National Statistics. That came after an unrevised 0.1% decrease in the preceding three months, which technically qualifies as a recession according to economists—two quarters of contraction followed by a decline.

With the exception of the first year of the pandemic, the GDP expanded by 0.1% overall in 2009, which was the worst yearly growth the UK has seen before 2009. The first three months of last year saw the UK economy increase by a quarter.

UK bonds rose for a second day, with 10-year rates dropping below 4% for the first time in a week after hitting a two-month peak around 4.2%. The likelihood of monetary policy easing this year has increased, with money markets completely pricing in three quarter-point cuts and a 10% possibility of a fourth, with the first drop anticipated by August.

At $1.2542, the pound fell 0.2% against the dollar, marking the start of a third day of losses.

Even though it was widely expected, the recession is another proof that the Bank of England’s efforts to reduce inflation had a negative impact. The results come at a particularly unfortunate moment for Sunak, as voters are due to cast ballots in two English parliamentary seats in the latest attempt to gauge the opposition Labour Party’s strength ahead of an anticipated general election later this year.

After assuming office in October 2022, Sunak proclaimed expanding the economy one of his five main promises, along with decreasing debt, halving inflation, shortening the wait times for health facilities, and halting boat migration over the English Channel. His main accomplishment to far is his promise to curb price increases, which is mostly under the bank’s control rather than the government’s.

“The prime minister will suffer a setback on a day when he could potentially lose two by-elections,” said Ruth Gregory, Capital Economics’ deputy chief UK economist. “The news that the UK slipped into technical recession in 2023.” However, this recession is the mildest of them all, and timely signs point to its impending termination.

Nevertheless, the achievement could put greater pressure on the ECB to accelerate rate reduction, which markets now anticipate will start by August. Although the BOE had also anticipated that the economy would not decline in the fourth quarter, Governor Andrew Bailey of the Bank of England downplayed the importance of a technical recession this week by pointing to evidence of a “upturn” in surveys spanning the beginning of 2024.