UK narrowly avoids a recession, but perhaps not for much longer

(Alliance News) - Despite nationwide strikes, sky-high inflation, and a chilly winter, the UK economy managed to sidestep a technical recession in the final quarter of 2022.

However, with the economy registering no growth at all in the fourth quarter, Oanda's Craig Erlam thinks the English sparkling wine should remain on ice for now, as recession was avoided by the narrowest of margins, suggesting that the recession can may simply have been kicked further down the road.

According to a first estimate from the Office for National Statistics, gross domestic product in the fourth quarter saw no growth from the third quarter. This follows a revised contraction of 0.2% seen in the third quarter.

This means the UK avoided a technical recession, which is defined as two consecutive quarters of negative growth.

Susannah Streeter at Hargreaves Lansdown suggested that instead of the UK "doing the timewarp and bracing for a recessionary return to the seventies", it could now be heading for an "early noughties-style period of stagnation."

ING's Francesco Pesole was even more pessimistic.

The weakness in the fourth quarter was concentrated in December, he noted, which means the starting point for the first quarter is now lower. This, he argued, "almost certainly" means the UK economy will get a contraction, "even if activity through the quarter effectively stagnates".

"Our own view is we'll get a 0.3% to 0.4% fall in GDP in the first quarter, and probably a slight fall in the second. Recession still looks narrowly the base case," Pesole said.

Analysts at Pantheon Macroeconomics were broadly in agreement, expecting GDP to decline by "almost 1%" between the fourth quarter 2022 and the second quarter of 2023.

The contraction, they argued, would be in response to the "simultaneous tightening of both monetary and fiscal policy", which will "squeeze households' real disposable incomes further, spur businesses to cut employment and investment, and trigger a sharp decline in residential investment."

"With other countries facing less severe headwinds from monetary and fiscal policy, the UK probably will be alone among advanced economies in seeing GDP drop this year," they added.

Victoria Scholar of interactive investor said Friday's GDP reading puts the UK central bank in the "unenviable position" of trying to raise interest rates to the extent that price pressures cool without inadvertently tipping the economy into a recession.

Last Thursday, the Bank of England lifted interest rates by another 50 basis points, taking the benchmark bank rate to 4.00% from 3.50%, in-line with expectations.

Shortly after, Catherine Mann, one of the nine interest rate setters at the bank, said it was too soon to pause hikes in the bank rate, warning that there are still big risks that inflation may prove stubborn, even if price rises appear to have passed their peak.

"We need to stay the course, and in my view the next step in bank Rate is still more likely to be another hike than a cut or hold," Mann said in a speech at the Lamfalussy Lectures Conference in Budapest.

For Laura Suter, head of personal finance at AJ Bell, Friday's data may be seen as a sign for the Bank of England to go "higher and harder" with rate rises at the next meeting of the Monetary Policy Committee on March 23.

By Heather Rydings, Alliance News senior economics reporter

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