UK's Near Miss with Recession: Analyst, Economist and Other Views

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The UK economy came to a standstill in the final quarter of last year, which has averted a technical recession for the time being but done little dispel the gloom in the air or the sense of impending doom evoked by economic forecasters who say the UK is still a long way from out of the woods.

Britain's economy contracted further than expected for December as GDP fell by -0.5%, more than offsetting a 0.1% increase from November while underperforming an economist consensus that had looked for only a -0.3% fall.

This brought the economy to a standstill for the quarter overall when GDP was unchanged with 0% growth, which came alongside a revision that deepened an estimated -0.2% contraction in third quarter to an estimated -0.3%.

The services sector was biggest weight around the ankles of the economy in December when it is normally the breadwinner, after output fell by -0.8% to reverse the sector's earlier contribution to the quarter overall.

Services GDP was unchanged with 0% growth in the final quarter as a result while a 0.2% decline in manufacturing output was enough to offset 0.3% growth in GDP from the construction sector, which is smaller than its manufacturing counterpart when measured in GDP terms. 

The data comes at a point of high uncertainty about the economic outlook.

Below are partial snapshots detailing some of what various analysts, economists and business people make of the data and expect for the year ahead. 

Luke Newman, UK equities portfolio manager, Janus Henderson

"The UK economy continues to display more resilience than feared with a technical recession avoided despite the headwinds created by the series of public sector strikes, which if adjusted for would actually suggest some underlying economic growth over the quarter."

"The message we are receiving from domestic consumer facing businesses is that the expected collapse in household spending following Christmas has simply not occurred, and whilst it is too early to call a significant reverse in trend, it does appear as if the UK consumer is in better shape than most economists’ forecasts had suggested following an easing in the headline rates of inflation and some signs of stability in energy markets."

James Smith, developed markets economist, ING 

"December’s 0.5% contraction in monthly GDP, which was worse than expected, can be largely blamed on either strikes (visible most clearly in transport and health, both of which shrank by close to 3% on the month) or, more bizarrely, a lack of Premier League football games in December due to the World Cup. That was enough to drive the recreation/entertainment category down almost 8%, though admittedly this is a volatile series."

"In short, following a couple of months of distortion surrounding the Queen’s funeral last September, it’s hard to discern the true underlying trend in the economy from this data. The reality is probably a very gradual deterioration in activity levels."

"Following this data, we’re pencilling in a 0.3-0.4% decline in GDP over that period, and this will probably be followed by a very modest hit in the second quarter too." 

Tahina Akther, barrister and co-founder, Wildcat Law

"Financial legal disputes, which kept lawyers busy in December, are usually a forerunner of a full recession and we saw a spike in enquiries coming through during the final quarter of last year."

"We have seen a rise in businesses looking to exit contracts but also firms asking us to assess the merits of claims for damages under contract clauses."

"The other enquiry area that has seen a large increase is that of pricing increase provisions in contracts. Unless these are drafted correctly, a business can find itself tied in to supply goods at a price that has become commercially unviable." 

Barret Kupelian, senior economist, PwC

"Looking forward, the economic outlook for most advanced economies has improved considerably, aided by a weaker US Dollar, a sustained decrease in the spot and future prices for natural gas and the reopening of the Chinese economy."

"All of these factors are expected to act as tailwinds to the UK economy in the near-term."

“In contrast, we expect the effects of tighter financial conditions to be increasingly felt across the real economy, both in the UK and the Eurozone, which will act as a headwind to growth." 

Rhys Herbert, economist, Lloyds Commercial Banking

"The detail of the drivers of GDP showed that growth in Q4 was driven by stronger growth in domestic demand partially offset by weakness in international trade."

Ian Hepworth, director, Funding Solutions UK 

"Businesses are facing rising interest rates, sky-high inflation and supply chain disruption, but there's still life in the economy despite the fact official figures show it was flat in the fourth quarter. Many businesses are highly resilient and their management teams are navigating through these headwinds."

"It's not all bad news. Amid the economic carnage, we have been putting in place trade finance facilities for businesses that are winning large orders, invoice finance facilities for those winning new customers and asset finance for those investing in new machinery to increase capacity."

"After three years of pain, the average UK business is now battle-hardened." 

Richard Carter, head of fixed interest research at Quilter Cheviot

"While the numbers may appear positive for now, overall the economy is flatlining and it is difficult to see that changing in the short-term. As such, we are still likely to be in a recession at some point during 2023 – which is still expected to be long and shallow - so these figures do not provide a huge amount of comfort."

“The Bank of England may well feel vindicated that the economy is so far surviving interest rates, but the toll on households has still been huge due to rising energy bills and high inflation, while the retail and hospitality sectors have had to deal with significant strike action."

Samuel Tombs, chief UK economist, Pantheon Macroeconomics

"Our measure of private-sector GDP—which excludes output in the education, health and public admin sectors, as well as imputed rent—in Q4 was 0.3% below its average level in the first two months of Q3. We think this is indicative of the economy’s underlying trend, as it is not influenced by the extra public holiday for the Queen’s funeral in September, nor by the rollout of Covid booster vaccines to the over 50s in Q4."

"Looking ahead, we continue to expect GDP to decline by almost 1% between Q4 2022 and Q2 2023, 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."

"Admittedly, the recent collapse in wholesale energy prices suggests that households’ real expenditure will be picking up in the second half of this year, dragging GDP up with it. But in 2023 as a whole, we estimate that GDP will be about 0.8% lower than 2022. With other countries facing less severe headwinds from monetary and fiscal policy, the U.K. probably will be alone among advanced economies in seeing GDP drop this year."