The United Kingdom has established itself as an important part of the world economy in various historical periods and has adopted an advanced model of free market economy. The country’s economy is based on a broad industrial base, an impressive presence in the financial sector and an active role in global trade. The country’s economic structure is diversified across technology, finance, manufacturing and services sectors, with London standing out as one of the world’s financial centers.
One of the most important turning points affecting the economic structure of the United Kingdom is the process of the United Kingdom’s departure from the European Union, known as Brexit. The Brexit period has raised many questions about the UK’s economy, and there are growing concerns that the country’s economy will be destabilized.
This process has brought about a series of changes affecting the economic dynamics of the UK. Brexit has led to economic uncertainties, with factors such as the reorganization of trade agreements, changes in customs processes and the introduction of new regulations for the business world.
The impact of Brexit has drastically changed the UK’s trade relations and economic integration. The creation of new trade agreements has required companies to revamp their supply chains. Moreover, the impact on the financial services sector has particularly affected London’s position as a financial center. The Brexit process has had a significant impact on the economic dynamics of both the UK and the European Union.
The UK economy, which experienced various fluctuations, contracted more than expected in the fourth quarter of 2023 and technically entered a recession. Markets had expected the economy to contract by 0.1% in the last quarter, after contracting by 0.1% in the previous quarter.[1]
According to the Statistical Office, Gross Domestic Product (GDP) fell by 0.3% in the last three months of 2023. In the July-September period, it contracted by 0.1%.[2] Economic contractions over two consecutive quarters indicate a recession.
A recession is a period when a country’s economy experiences a decline in overall measured economic activity, usually over one or more quarters. Economic recessions usually have a negative impact on economic indicators such as increases in unemployment, decreases in consumption and investment, and contractions in the production of goods and services.
Two consecutive quarters of negative growth in the UK is generally considered a technical recession. The country’s weakening last year followed 4.3% growth in 2022. Excluding the pandemic year in 2020, last year was the weakest year of economic growth since the 2009 financial crisis.
One of the main reasons for the stagnation of the economy is that the Bank of England aggressively raised its key interest rate to a 16-year high of 5.25% to bring inflation down to 4%. The central bank has been wary of cutting interest rates prematurely, as lower interest rates would boost spending and put upward pressure on prices again. As a result, regardless of when the elections are held, debt costs are expected to remain higher than in the past 15 years and growth is expected to remain limited.
It is reported that every major sector of the economy contracted in the last quarter of 2023, with manufacturing, construction and wholesale trade being the main drivers of growth. This contraction is seen as a blow to the government’s economic growth plans. Indeed, after the data was released, Sterling depreciated by 0.1% against the Dollar and the Euro.[3]
The current recession is considered mild and some economists argue that it could be short-lived. Despite the economic difficulties, there are signs of resilience in the labor market and wages have outpaced inflation for five consecutive months. But there are concerns that a growing population is masking the effects of the recession. The economy has not grown since early 2022 when population growth is taken into account. Critics argue that the government’s plan to grow the economy is no longer feasible.
“While the shallowness of this recession provides some relief, these figures confirm that our economy has remained in a cycle of continuous stagnation throughout 2023,” said Suren Thiru, Economic Director.[4] As of 2024, the United Kingdom has entered an election period. This recession could further complicate the ruling Conservative Party’s two local elections in the UK. At the same time, it could increase the already large lead of the main opposition Labour Party in opinion polls ahead of the general election expected this year.
The data also provides a negative backdrop for the government’s annual budget next month. It is possible for the Conservatives to try to regain political momentum. But government spending may also need to be cut as public finances are stretched. Nevertheless, the economy has performed better than many economists predicted a year ago. Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, commented:[5]
“Labeling the decline in economic activity in the second half of 2023 as a recession is an exaggeration. This is because employment continued to grow, real wages recovered, and measures of business and consumer confidence returned to levels consistent with rising activity by the end of the year.”
Rachel Reeves, who will become Treasury Secretary if Labour wins the election, blamed the Conservatives for “14 years of economic decline”. She blamed Rishi Sunak for the recession and said that the people of the United Kingdom would pay the price.[6]
As a result, the UK economy has slipped into recession, a challenge to the promises of economic growth made in the wake of the Covid-19 pandemic. Economic data highlights the challenges facing households and firms, while high interest rates are putting pressure on borrowing costs that threaten economic growth. While the recession is thought to be mild, concerns are growing that population growth is masking the effects and the economy has not grown since early 2022. This may be a plus for the opposition. But what is most obvious is that the Sunak-led ruling coalition has turned negative and is now facing a tough test. The possibility of the Bank of England cutting interest rates could play a critical role in efforts to ease economic pressures. However, due to inflation and uncertainty, it remains unclear when it will happen.
[1] Elliot Smith, “UK Economy Slipped Into Technical Recession At The End Of 2023”, CNBC, https://www.cnbc.com/2024/02/15/uk-economy-slipped-into-technical-recession-at-the-end-of-2023.html, (Date of Access: 15.02.2024).
[2] Hanna Ziady, “Britain Falls Into Recession, With Worst GDP Performance in 2023 in Years”, CNN Business, https://edition.cnn.com/2024/02/15/economy/britain-falls-into-recession/index.html (Date of Access: 15.02.2024).
[3] Andy Gregory, “What Does Britain Being in A Recession Mean?”, The Independent, https://www.independent.co.uk/news/business/recession-economy-explained-gdp-what-b2496657.html, (Date of Access: 15.02.2024).
[4] Same place.
[5] Same place.
[6] Pan Pylas, “UK Fell İnto Recession At The End Of 2023 As Economy Takes Center Stage in Runup To General Election”, AP News, https://apnews.com/article/britain-economy-recession-interest-rate-720092b0e5ad65f48b10e656e22c6687, (Date of Access: 15.02.2024).
