UK economy shrank at the end of last year

The UK fell into recession during the final three months of last year, official figures show, after the economy shrank by more than expected.

Gross domestic product – a key measure of economic activity – dropped by 0.3%.

It follows a fall between July and September. The UK is considered to be in recession if GDP falls for two successive three-month periods.

It raises questions over whether Rishi Sunak has met his pledge to grow the economy.

It was one of five promises that the Prime Minister made in January 2023. However, it is not clear what measure the government will use to determine whether Mr Sunak has kept his pledge or not.

For the whole of 2023, the economy grew by 0.1%.

Nevertheless, excluding the Covid years, that annual growth figure is the weakest since 2009 when the UK and major economies were reeling from the global financial crisis.

Shadow chancellor Rachel Reeves said the data showed that Mr Sunak’s pledge to grow the economy was “in tatters”.

Meanwhile, Chancellor Jeremy Hunt is less than three weeks away from unveiling his latest Budget.

The government can use growing GDP as evidence that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians say the government is running it badly.

If GDP is going up steadily, people pay more in tax because they’re earning and spending more. This means more money for the government that it can choose to spend on public services, such as schools, police and hospitals.

Governments also like to keep an eye on how much they are borrowing in relation to the size of the economy.

Treasury sources have confirmed to BBC News that the chancellor is looking at a larger pencilled-in squeeze on public spending as a way to deliver tax cuts in the Budget on 6 March.

Forecasts for the public finances have materially deteriorated in recent weeks as interest costs on UK government borrowing has increased. Final decisions have not been made.

Commenting on whether or not Mr Sunak had fulfilled his pledge to grow the economy, Mr Hunt told the BBC: “When the prime minister made his commitment he was very clear, tackling inflation had to come first.

“The big picture is that actually since then the economy has been more resilient, unemployment has stayed low, real wages have been rising now for six months. And if we stick to our guns now, we can see light at the end of the tunnel.”

But Mr Reeves said: “This is Rishi Sunak’s recession and the news will be deeply worrying for families and business across Britain.”

Ruth Gregory, deputy chief UK economist at Capital Economics, said “this recession is as mild as they come”, adding that the data “is more politically significant than it is economically”.

However, Lord Rose, chairman of Asda, the supermarket group, told BBC Radio 4’s Today programme: “It looks like a duck, it quacks like a duck, it walks like a duck, it is a duck – it is a recession.

“It doesn’t matter if it is a technical recession or not. There is no surprise here and I take no pleasure in saying there is no surprise that we’re in it. We’ve got a low growth economy or a no growth economy.”

Figures from the Office for National Statistics (ONS) showed that during the final three months of last year, there was a slowdown in all the main sectors it measures to determine the health of the economy, including construction and manufacturing.

The figure for the final three months of last year was worse than a 0.1% fall widely forecast by financial markets and economists.

GDP for the third quarter, between July and September fell by 0.1%.

Mr Hunt said: “While interest rates are high – so the Bank of England can bring inflation down – low growth is not a surprise.”

Recent figures showed that inflation – which measures the pace of price rises – remained at 4% in January. That is twice the Bank’s 2% target.

The Bank of England had been lifting interest rates to put the brakes on inflation but has kept them at 5.25% since August last year.

Ms Gregory said the latest economic figures “might nudge the Bank of England a little closer to cutting interest rates”.

“But we doubt the Bank will be too worried about what is likely to be a mild and short recession,” she added.