Britain suffers longest ever hit to living standards

Economy slides into recession with much larger decline than expected as number in work drops

BRITAIN is suffering the longest hit to living standards on record, according to official figures that showed the economy is in recession.

The Office for National Statistics (ONS) said output per person fell sharply at the end of last year, meaning the economy has failed to grow since early 2022 after accounting for population growth.

It marks the longest period of falling or stagnating living standards since records began in 1955 as economists warned that the first technical recession since 2020 masked a far deeper downturn in living standards.

The drop in so-called GDP per head contributed to an overall economic decline of 0.3pc in the final three months of last year in a blow to Rishi Sunak as he prepares to fight a general election this year.

The decline was much larger than predicted by analysts and follows a fall of 0.1pc in the previous three months. It means the UK has fallen into its first technical recession since the economy locked down four years ago.

GDP per head, which measures economic growth adjusted for population size, is seen as a good proxy for living standards because when an economy generates more value per person each year that usually translates into higher household incomes.

Grant Fitzner, the ONS’S chief economist, said: “What matters for living standards and ultimately things like public sector finances i s whether, adjusted for changes in the population, you are growing or shrinking.”

Mr Fitzner also warned that economic inactivity was a major factor holding back growth. The UK remains the only G7 nation yet to return to pre-pandemic employment levels.

He said: “If more people were in work, consuming, producing, we would have higher GDP numbers. The fact that economic activity fell significantly post-pandemic and has only partly recovered is one of the factors underpinning weaker growth. Obviously that would also underpin weaker consumer spending, given there are fewer people in employment and spending money.”

The data also showed the economy barely grew last year, expanding by just 0.1pc. Excluding the pandemic, this is the weakest annual growth since the financial crisis in 2009.

Weaker growth suggests the Bank of England may be forced to cut interest rates faster to support the economy.

However, Megan Greene, a Bank of England policymaker, warned that there was no guarantee it would cut interest rates when inflation fell to 2pc.

She said that consumer price rises falling back to the Bank’s 2pc target was not enough to “declare victory” and start lowering borrowing costs.

Statisticians said the quarterly drop was driven by a broad-based decline across all sectors of the economy, including a 0.2pc drop in services output and a 1.3pc fall in construction in the final three months of the year. House building has now been in decline for more than a year.

The ONS said a big decline in retail sales across the quarter hit the economy amid a disappointing Christmas season that saw households bring forward present-buying to take advantage of November Black Friday deals.

There was evidence suggesting that more parents pulled their children out of school early ahead of the holidays, highlighting ongoing concerns about attendance since lockdown.

The figures mark the end of a week of crucial economic data for the Prime Minister in which inflation remained steady but rising sickness continued to hurt the economy.

The drop in output in the final quarter suggests the Office for Budget Responsibility, the Government’s economic watchdog, is likely to downgrade its forecast for growth of 0.7pc this year.

Separate figures from the European Commission suggest Germany’s economy will also grow more slowly than expected this year. The Commission slashed its forecasts for German growth by more than half, from 0.8pc to 0.3pc in 2024. It warned that high interest rates, labour shortages and weak confidence were holding back growth in Europe’s largest economy.

‘Britain remains a stagnation nation, and there are precious few signs of a recovery’

Jeremy Hunt will deliver the Budget next month against an economic backdrop of recession, rising worklessness and soaring debt.

It wasn’t the feel-good factor he was hoping for, as the Chancellor and Rishi Sunak, the Prime Minister, gear up to fight a general election later this year.

The economy shrank by 0.3pc in the final three months of 2023, pushing it into its first technical recession since the 2020 lockdown.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), says the challenge is straightforward – too many people are sitting on the sidelines, neither working nor looking for a job, an issue that has surged in importance since the Covid crisis.

Coupled with a jump in children being taken out of school during term time, this has held the economy back.

“If more people were in work, consuming, producing, we would have higher GDP numbers, so the fact that economic activity fell significantly post-pandemic and has only partly recovered is one of the factors underpinning weaker growth, and obviously that would also underpin weaker consumer spending, given there are fewer people in employment and spending money,” Fitzner said.

Worklessness has shot up since the pandemic, despite businesses advertising a record number of job vacancies, pay rising sharply and bosses resorting to recruiting large numbers of migrants to fill the gaps.

A total of 9.3m people of working age are currently “inactive” – neither in work nor looking for work.

This includes 2.8m who are out of the workforce because of long-term sickness, a figure which has jumped from 2.1m before Covid.

At the same time businesses have 932,000 vacancies, indicating that they want to grow but are unable to because they cannot get the staff.

Fitzner said the workless crisis was one of several factors dragging down an economy that has been hit hard by soaring energy prices. “It is not the only factor, but it is one of several. In some ways the UK is unique,” he said.

“We saw a similar large fall in labour force participation in the US to the UK, and like Europe we have also been hit by those energy shocks. So much of what we saw in 2023 was the combined impact of fewer people in the workforce, and those energy shocks working through the economy.”

The ONS also blamed “a drop in school attendance” for pushing the economy into recession. While statisticians said some of this was driven by “higher sick rates or [children] potentially leaving school a little bit earlier so they don’t get sick during Christmas”, the number of pupils missing the majority of school in England has doubled since the start of the pandemic. This may be down to a possible permanent change in attitudes towards attendance post-lockdown.

The value of education is included in economic growth figures in the same way doctors’ appointments and elective procedures are. In fact, seeing a GP face-to-face boosts the economy more than a virtual appointment.

Economists at the Centre for Social Justice have highlighted that 140,706 pupils were absent more than they were present in spring last year, or almost 2pc of the school population. This compares with 60,244 in autumn 2019, before the pandemic.

Beth Prescott, at the Centre for Social Justice (CSJ), said: “Successive lockdowns have broken the contract of trust between schools and parents, with CSJ research finding that almost three in 10 parents say that the pandemic has shown it is not essential for children to attend school every day.

“School absence has a damaging effect on a child’s future life chances. Previously absent pupils are overrepresented among those not in education, employment or training as young adults and analysis uncovered that previously persistently absent children are around three times more likely to go on to commit a crime within two years of leaving school. The Government must get to grips with the absence crisis. If they don’t, the country will feel the social and economic consequences for years to come.”

Britain’s worklessness dilemma is highly unusual, even in a recession. In the wake of the financial crisis, companies slashed hiring. In 2011 job vacancies were down below half a million, while inactivity peaked at 9.5m. But the reasons for dropping out of the workforce were very different.

It was harder to find a job, making alternatives more attractive. As many as 2.4m people said they were not seeking work because they were looking after their homes and families. That is down at 1.6m today.

Similarly 1.6m in 2011 said they had taken early retirement – a common option for a worker who loses their job in a recession when they are approaching the state pension age. Now the number of under-64s who say they are retired is below 1.1m, a difference of half a million people. Instead sickness and study are bigger drivers of inactivity today, up by 600,000 and 200,000 respectively compared with their level in 2011.

Rachel Reeves, the shadow chancellor, described Britain’s inactivity problem as “absolutely a huge challenge in our economy”.

Speaking to reporters, she described Britain as an “outlier amongst other countries around the world in failing to get people back to work since the pandemic”. The UK remains the only G7 nation yet to return to pre-pandemic employment levels.

Ms Reeves added: “For many of those people, their lives are on hold and they’re not able to work because they are waiting for hospital appointments, operations and procedures. We’ve got to tackle that backlog.”

Mr Sunak has acknowledged that he has failed to keep his promise to cut healthcare waiting lists. In November, NHS England figures showed 7.6m treatments were yet to be carried out.

However, Britain’s tax and spending watchdog suggests Reeves’s diagnosis is incorrect. In a report last summer, the Office for Budget Responsibility (OBR) noted that only a “relatively small proportion of those inactive for health reasons are on the NHS waiting list”. In its fiscal risks report, the OBR estimated that halving the NHS waiting list over five years would only reduce working-age inactivity by around 25,000.

The drop in GDP itself is also not the whole story. As a headline figure, it shows the latest estimate for the overall size of the economy in a three-month period. Alone, this does not show whether the typical person is any better or worse off.

GDP per head shows the size of the economy divided by the population.

That population is rising – in part because of migration– so a growing number of people, cumulatively, are producing less, which bodes ill for living standards. GDP per capita fell by 0.6pc in the final quarter.

On this measure, things look bleak. GDP per capita has been flat or falling for the past seven consecutive quarters – almost two whole years, and the longest such stagnation on records dating back to the 1950s.

James Smith, economist at the Resolution Foundation, said: “After accounting for population growth, the UK economy hasn’t grown since early 2022, and [it has] fallen far behind its pre-cost of living crisis path, with an equivalent loss of around £1,500 per person. The big picture is that Britain remains a stagnation nation.”

There have been more acute crises in the past – the six-quarter drop in GDP per capita in the financial crisis was much deeper, and pay is currently growing faster than prices so the average worker should feel better off – but there is no end in sight for this long stagnation. And there is no sign yet, as Hunt prepares his Budget, that he can get the masses on the sidelines back into school or work.