UK Recession Overview

Almost all multilateral organisation (like IMF, World Bank etc…) claims that the world economy is going to face a recession including the UK. There is an ongoing debate about whether the UK will face a recession or avoid a recession. However, in this article, we are going to see an overview of the UK economy. We will try to look into the ongoing debate by the end of this article. Let us start with the main indicator Gross Domestic Product (GDP).

Gross Domestic Product (GDP)

On 10th February 2023, Office for National Statistics (ONS), UK, released the GDP data for the Fourth Quarter (Q4). The following is the summary from the Statistical bulletin:

There are some small revisions to the Quarterly path of real GDP specifically for Q1 (i.e. First Quarter – Jan to March) of 2022 and Q3 (i.e. Third Quarter – July to September) of 2022. These revisions are due to some revisions to the individual components of GDP. These are in line with National Accounts Revision Policy.

The GDP for the Q4 (i,e. Fourth Quarter) of 2022, is now estimated at 0.8%. This is below the pre-pandemic level (i.e. Q4 of 2019). The Annual Estimates of GDP have increased by 4% in 2022.

Fig 1 Real GDPNotes:

  1. Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept) and Q4 refers to Quarter 4 (Oct to Dec).
  2. Index is referenced to Quarter 4 (Oct to Dec) 2019.
  3. This release sees revisions to the course of 2022 in line with the National Accounts revision policy. For more information, see the revisions to GDP section.

Table 1 Real GDP 1
Source:  Office for National Statistics – GDP first quarterly estimate

Notes

  1. Percentage change on the previous period.
  2. Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept) and Q4 refers to Quarter 4 (Oct to Dec).
  3. Population data are consistent with the mid-2020 estimates published on 27 January 2023.
Implied Price of GDP of Q4 of 2022

Before dwelling on the Implied Price of GDP data it is pertinent to understand what is meant by implied GDP deflator and why is important. The Implied GDP deflator signifies the extensive measure of inflation in the domestic economy. It reflects changes in the price of all goods and services that include in GDP. GDP deflator covers the whole of the domestic company, not just consumer spending, and also reveals the change in the relative prices of exports to imports.

Figure 2 The implied price of GDP increased by 6.6 compared with the same quarter a year ago 1

Notes:

  1. Q1 refers to Quarter 1 (Jan to Mar), Q2 refers to Quarter 2 (Apr to June), Q3 refers to Quarter 3 (July to Sept) and Q4 refers to Quarter 4 (Oct to Dec).
  2. Components contribution may not sum to total because of rounding.
  3. An increase in import prices contributes negatively to the implied GDP deflator, while a decrease in import prices contributes positively to the implied GDP deflator.
  4. The implied price of GDP for Q4 of 2022, increased by 1.3%. This is mainly due to increase in household consumption prices, whereas the import prices came down in Q4 of 2022.

Compared to the implied price of GDP for Q4 of 2021 the implied price of GDP was 6.6% more in Q4 of 2022. A strong increase in prices of household consumption is the main driven factor behind this increase in the implied price of GDP for Q4 of 2022. The prices of internationally traded goods and services were more volatile.

Output

According to the Statistical bulletin, there are some revisions to earlier quarters in 2022 for some industries. There was an increase in 8 of the 20 sub-sectors in Q4 of 2022, whereas the remaining 12 subsectors witnessed a decrease.

The Services output was flat, production output decreased by 0.2% and construction output increased by 0.3% in the Q4 of 2022 (i.e from Oct to December).

Services

Services produced witnessed no change in output in Q4 of 2022; though it is slowing from a 0.2% increase in the previous quarter. Overall, the Service sector increased by 5.5% in 2022.

In the Service sector, the major contribution to the growth was from administrative and support service activities, mainly from travel agents this increased by 14.8% in Q4 of 2022 – there was a fall in the previous quarter in this sector.

On the other hand, this was balanced by a decline in education (1.6%) and transportation & storage output (2.4%).

Production

In Q4 of 2022, the production output contracted for the sixth consecutive quarter – the production decreased by 0.2%.

This is mainly attributed to the declines in electricity, gas, steam and air conditioning supply (1.3%) and mining and quarrying (1.6%). This declining trend is continuing from the last quarter.

This is due to a decrease in energy volumes which is ultimately reflected by a change in the behaviour of consumers and businesses. This change in the behavioural pattern of businesses and consumers is due to high energy prices.

Construction

The Construction sectoral output is slowing since the first half of this year. In Q4 of 2022, the Construction output increased by 0.3%. This is mainly attributed to infrastructure growth of 6.5%.

This is the strongest growth since Q2 (i.e. April to June) of 2021, which witnessed 6.5%, and the first positive quarterly growth since Q3 (i.e. July to Sept) of 2021.

Private housing (both new work and R&M) witnessed a decrease of 3.2% and 3.5% respectively in Q4 of 2022. This is the first time quarterly decrease in Private housing R&M since Q2 of 2022. This shows that there is a lack of demand, cost of living challenges and funds in this area.

Expenditure

In Q4 (i.e. Oct to Dec) of 2022, there was a modest increase in private consumption by 0.1%, along with higher business and government investment in the same quarter. However, in Q4 of 2022, there was a decrease in the volume of net trade along with a decrease in exports.

Private consumption

The real household expenditure rose by 0.1% in Q4 of 2022, the same has witnessed a contraction of 0.4% in the last quarter (i.e. Q3 of 2022). The previous quarter witnessed contraction as real income was reduced due to higher inflation in the second over the second half of 2022.

However, the decline in household goods & services, food & non-alcoholic drink, and recreation & culture continued.

The household expenditure has increased by 1.3% in Q4 of 2022 in terms of current prices. This is because of an increase in the nominal value of expenditure due to inflationary pressures.

In Q4 of 2022, the implied price of household expenditure rose by 9.1% in comparison with Q4 of 2021.

Consumption of Government Goods and Services

Q4 of 2022, witnessed an increase in Real Government Consumption Expenditure by 0.8% including an increase in the health sector in all the quarters. The volume of spending on public administration, defence and health is reflected in this increase in Real Government Consumption Expenditure.

Gross Capital Formation

In Q4 of 2022, the Gross Fixed Capital Formation (GFCF) rose by 1.5%.  This increase is attributed to an increase in business and Government investment. However, this was partly balanced by a decline in dwellings investment.

Business investment has increased by 4.8% – this is equal to its pre-pandemic level. However, Q4 of 2022 witnessed a decrease in the implied price of business investment – this is pointing to some softening of these price pressures.

Net Trade

Brexit has impacted the UK’s trade in goods. Data collection of goods exports from Great Britain to the EU has moved from the Instrastat survey to customs declarations; this was started in January 2021. This was followed by the moving of data collection of imports from the EU to Great Britain which happened last year in January 2022.

ONS said that both these moves impacted the trade statistics time series and recently it has applied adjustments to imports of goods from the EU in 2021. This is to balance imports and exports on a like-for-like basis for that year. Now, the ONS is working to create the back series for consistent historical series.

The trade deficit for goods and services has increased to 1.3% of nominal GDP in Q4 of 2022. But, there were significant fluctuations in non-monetary gold compared to the last quarter, this can be a sign of volatility. So if we exclude this non-monetary gold then the trade deficit for Q4 of 2022 was 4.2% of nominal GDP.

Nominal GDP / Income

In Q4 (i.e. Oct to Dec) of 2022, the Nominal GDP has increased by 1.3%. In comparison with the corresponding period of last year (i.e. Q4 of 2021) then the Nominal GDP has increased by 7.0%.

This increase in Nominal GDP was attributed to Gross Operating Surplus (GOS) and compensation of employees. In Q4 of 2022, the GOS witnessed an increase of 15.2%. But, by excluding the alignment adjustment, the corporations’ GOS increased by 6.2% – this was due to the energy price guarantee scheme.

However, taxes minus subsidies affected the growth. The Q4 of 2022 estimates show that taxes minus subsidies decreased by 22.5%. This is mainly due to the large increase in subsidies. The large increase in subsidies is attributed to the energy price guarantee scheme and the energy bill relief scheme.

The Statistical Bulletin for the Fourth Quarter GDP summary ends here. But, another important factor which is not in the summary is Inflation. The inflation data is released for January 2023, on 15th February 2023. Here is the gist of the same

Inflation

The Consumer Price Index (CPI) inflation increased by 10.1% in the 12 months to January 2023, this is a decrease of 0.4% compared to December 2022 (where it was 10.5%).

This means inflation is slowly coming down. The press release stated that the decrease in inflation is due to a decrease in transport (esp. passenger transport and motor fuels), and restaurants & hotels. This decrease is attributed to an increase in the prices of alcoholic beverages and tobacco making the largest partial offset upward contribution to the change.

Ongoing Debate on Recession and Conclusion

There is an ongoing debate on recession for not only the UK but for many developed nations. Last year October IMF in its outlook estimated that UK’s growth will be 0.3% in 2023. However, IMF in its Latest World Economic Outlook forecasted that the UK’s output will grow by 0.9% in 2024.

What do official data say?

However, the official data from ONS didn’t show that the UK has even entered a recession now. Though still, a lot more needs to be done by the UK in terms of investment, improving the standard of living etc…

What affects the UK?

From the Statistical Bulletin, two things are clear they are i) First is Brexit. Great Britain is badly affected by Brexit. The trade gap (i.e. exports and imports) between the UK and the EU has widened from £2.4bn to £26.8bn. ii) Secondly, the energy price guarantee scheme. This is hurting the economy as a whole.

The Russian sanction is hurting the UK and resulting in higher cost of energy prices. This increase in energy prices is compensated by the subsidy programme called the Energy Price Guarantee Scheme. However, it seems that the UK may avoid blackouts this summer. There are some news reports which is stating that the government may reduce the level of energy support for households and businesses during spring. This may rise inflation which will result in to increase in the cost of living and ultimately may put the economy under greater concern.

Policy Responses and Conclusion

There may be simultaneous policy tightening, both monetary as well as fiscal, due to inflationary pressure. This will affect the real disposable income of the people which will result in less investment opportunities for the businesses and also will lead to more unemployment. All this will eventually affect and reflect in the GDP.

The inflationary pressures around the corner, along with the widening trade deficit, increasing unemployment and tightening policy responses may push the UK economy into stagnation first (may be in the first quarter) before facing a shorter and mild recession.