UK narrowly avoids recession after figures show growth flatlining

The UK has avoided entering a recession by the slimmest of margins as figures show its trade deficit with the EU hit record levels in the last three months of 2022.

A decline in gross domestic product (GDP) of 0.5% in December was offset by increases in the two previous months to leave the economy’s performance in the fourth quarter at roughly the same level as the previous three months.

Negative growth in the fourth quarter would have signalled recession, after the UK economy shrank by 0.2% in the third quarter – a figure revised up from the initial estimate of a 0.3% contraction. A technical recession is generally defined as two consecutive quarters of negative growth.

The chancellor, Jeremy Hunt, said the figures underscored Britain’s resilience, adding that they showed the economy was the fastest-growing in the G7 group of rich nations last year.

However, the economy remains 0.8% below its pre-pandemic peak in 2019, in contrast with the US, which has experienced growth of 5.1% over the same period, and the 2.4% improvement among the 19 members of the eurozone.

Business groups said the situation remained difficult, with one describing the drop in December as “brutal” and a harbinger of a difficult year ahead.

The dismal growth figures came as separate data showed trade with the rest of the world declined during the last quarter along with retail sales, with the normally buoyant shopping period in the run-up to Christmas failing to live up to hopes.

The Office for National Statistics said the UK’s trade deficit with the EU widened in the final quarter of 2022 to its highest level since records began in 1997 as imports from the bloc rocketed to £82bn against an exports total of £49.2bn.

While the deficit largely reflected the huge increase in gas imports, the ONS said there was a sharp deterioration in the balance of goods and services traded with the rest of the world. It said the shortfall widened £2.4bn to £26.8bn, which the statistics agency said was “driven by lower exports of both goods and services”.

The shadow chancellor, Rachel Reeves, said the economy was “stuck in the slow lane” and called on Hunt to bring forward “a proper windfall tax on oil and gas giants” to prevent a 40% increase in household energy bills in April that she said would make the cost of living crisis worse.

Hunt is under pressure to open his chequebook to maintain a subsidy for household gas bills beyond April by blocking a £500 increase in the energy price cap to £3,000. Many of his MPs believe the economy is unlikely to recover unless he also increases the pay offer to public sector workers to end a string of debilitating strikes.

In a round of TV interviews, he said he could not afford to extend the £2,500 energy price cap and an increase in public sector pay would be inflationary.

The Confederation of British Industry said that without a significant move by the government to aid businesses a recession in 2023 was likely. It said the chancellor needed to take “a bolder approach to tackling labour and skills shortages and falling business investment”.

Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said: “Despite skirting a technical recession for now, December’s GDP fall confirms that the economy took a nosedive at the end of 2022.

“The UK is facing a particularly brutal year, with high inflation, stealth tax rises and the lagged impact of numerous interest rate hikes still likely to push us into a summer downturn by hammering incomes and confidence.”

Strike action across many industries and a drop in school attendance were also blamed for the sharp drop of GDP in December. The ONS said the quarter’s figures were rescued by a return to the office that pushed up activity in the administrative sector.

With the cost of living crisis eating into household spending power and many small businesses struggling to stay afloat, few economists had predicted a strong performance for the final quarter of last year.

Bank of England policymakers said in their latest outlook for the UK economy that they expected GDP to grow by 0.1% in the last three months of 2022.

Ben Jones, the lead economist at the CBI, said: “We may have avoided a technical recession late last year but we probably won’t avoid one this year. While we expect that the downturn will be shallow, if we act now, we can make the recession even shorter than predicted.

“All eyes are on the chancellor’s March budget, when businesses will be looking for a bolder approach to tackling labour and skills shortages and falling business investment. In particular, firms will be looking for a permanent replacement to the super-deduction, as well as a focus on innovation and the green economy, to help boost economic growth in the years ahead.”