Is Britain now in recession... and does that really matter?

The possibility of recession is never a good look for a government, but Rishi Sunak may just manage to fulfil his pledge to ‘grow the economy’ in 2023 after all. Sean O’Grady examines the latest ONS figures, and what they mean for a party whose prospects as we enter an election year are already looking grim

Has Rishi Sunak managed to achieve his promise to grow the economy in spite of the latest figures? (PA Wire)

The latest growth figures show that the British economy shrank marginally during the third quarter of 2023. This means that, on this latest, revised, estimate produced by the Office for National Statistics (ONS), by the end of September the economy was producing 0.1 per cent less in the way of goods and services than it was at the beginning of July. This is a little worse than previously thought (in an earlier estimate of change).

With one such quarter having produced so-called “negative growth”, in the oxymoronic economic jargon, the possibility now arises that the UK may be in a second one currently, and might thus even now be in a shallow, mild, “technical” recession, but a recession nonetheless. That is to say, a “recession” by the customary definition of two successive quarters of economic “negative growth”, ie decline. In other words, the nation as a whole is getting poorer.

The new figures pose some interesting questions...

Are we in a recession now?

Possibly, but it can be argued both ways – the stats are multifarious and complicated. The third quarter does appear to be slightly negative, but it might be revised up. If the fourth quarter is positive or shows zero growth, then we can’t be in a recession – unless it is revised downwards later on, and the third quarter stays negative. Also, if the first quarter of 2024 shows another decline, we may still be in recession then.

Technically, there will probably have been growth overall in 2023 – but also, quite possibly, a technical recession in the second half.

Does it mean Rishi Sunak has failed to deliver on another of his key pledges?

It’s annoyingly debatable. The speech he made on 4 January 2023 was titled “Prime Minister Rishi Sunak makes a speech setting out his priorities for 2023”, and he stated only that his aim was to “Grow the economy”. He went on: “Those are the people’s priorities. They are your government’s priorities. And we will either have achieved them or not. No tricks... no ambiguity... we’re either delivering for you or we’re not. We will rebuild trust in politics through action, or not at all. So, I ask you to judge us on the effort we put in and the results we achieve.”

The trouble is, judging them is quite difficult, because the numbers can actually be quite “ambiguous”, or at least capable of giving rise to differing interpretations.

In 2023, then – if this current winter quarter isn’t too bad – it may turn out that the economy has grown modestly during the course of the calendar year. That’s because it scored a decent gain in the first quarter, of 0.3 per cent (bouncing back from Covid), followed by zero growth in the second quarter. Even if the small setback in the third quarter is followed by a similar very small reduction in output in the final months of the year, then the economy will still have grown in 2023 – despite sliding into a slight recession in the second half of the year and going into 2024. A game of two halves, then.

In any case, it doesn’t feel much like the economy is growing, and we’re dealing with the tiniest of margins in terms of whether the prime minister has passed the test in some binary manner. “Growth” suggests a noticeable increase in activity and wellbeing – and that is absent.

When will we know?

When the first tranches of data for November and December come out, in mid-January and mid February 2024 respectively. Then there will be a much clearer picture, but that data may be revised up or down in the succeeding months. So a definitive answer might not even be known by the time of the election.

Isn’t this all a bit technical?

Yes, and it need not be. We tend to fuss far too much about the word “recession”. The differences between minimal growth, stagnation, and mild or technical recession are frankly imperceptible in the real world. The definition of a recession is arbitrary (dating back to American academic research in the 1970s); a better way of looking at it might be to take into account measures such as for how long the economy has been struggling; the extent to which that pressure is generally felt or concentrated in certain sectors; and how deeply it is contracting.

We are not, it is clear, in a depression or a slump, and the stagnation may not last for long. But for historical context, the UK “should” be growing at, say, 2 to 3 per cent in order to deliver a rising trend in consumption and the standard of public services. So quibbling about the odd 10th of a percentage point, which in any case can be revised, does seem a bit silly.

It’s also worth mentioning that the arrival of the digital economy, coupled with changes in the way the ONS measures activity, is also making the figures more difficult to calculate and analyse. Notably, the ONS has had to revise its figures for post-pandemic recovery sharply upwards.

What does it mean for living standards?

It’s bad news, because they only improve if productivity and output grow. The only way to achieve that is with borrowing, and the opportunity for that has narrowed markedly.

Will these figures affect the government’s prospects in the coming election?

They’re not helping. Leaving aside all the talk about shop sales, leading indicators, indices and statistic revisions, the economic mood is plainly gloomy, as it has been for some time during this cost of living crisis. Confidence among businesses and consumers is something we can all sense, and at the moment it seems relatively fragile. Things may improve in 2024, but conditions are unlikely to be radically different even by this time next year; economies tend not to turn around that quickly. Unemployment may tick higher in the coming months.

The basic political assumption must be that Sunak is playing Mr Micawber and hoping that “something will turn up”. If he is waiting for some concrete, tangible improvements to be felt by households, then that will mean postponing an election – which it was previously assumed would be held in 2023 – and waiting until well into 2024 before he asks the country for his own mandate.

Is there any good news for the government?

The very weakness of the economy has helped to push inflation down, and therefore it may be that the Bank of England will ease interest rates sooner than expected – but probably not by much, if at all, in the short run. With rates lower, the chancellor may have a little extra room for some popular tax cuts in the spring Budget. So there might be some thin silver linings adorning the clouds.

Even so, the voters may well discount any tax cuts or even reductions in interest rates on the grounds that they are modest in the context of past interventions, and may be reversed in any case if the economy doesn’t pick up, and/or inflation, though low, proves difficult to get back to within the 2 per cent target.

In addition, after what will have been 14 years of Conservative or Conservative-dominated governments, and post-Brexit, the electorate will be taking more of a view on the entirety of the government’s record in office. That might help the Conservatives in one way, because some elements of their longer-term record will look more impressive than the miserable post-2019 picture, dominated by Brexit and the pandemic; but it’ll also remind people of just how long this lot have been in power, and intensify the mood that it could now be “time for a change”.