Last week, official figures revealed that the UK had entered a “technical recession” in the second half last year. The drop in Gross Domestic Product (GDP) was 0.3 percent in the fourth quarter after a 0.1 percent fall in the third.
There’s much more than the GDP number can tell us about the current state of the economy.
In terms of individuals, GDP, or national income per capita, is what matters. Not the total. This measure has shown that the economy is unquestionably weak and in decline. The GDP per person fell by 0.6% in the fourth quarter of 2018, after falling by 0.4 percent in the third. The GDP per head has dropped for six out of seven quarters. This is a record-breaking run of decline. It’s also below what it was when the December 2019 general elections were held.
While GDP rose by just 0.1 percent, GDP per capita fell by 0.7%. In general, the GDP must rise by 0.2% or 0.3% per quarter, due to population growth, to avoid a further decline in GDP per person. The Bank of England is expecting a GDP rise of only 0.25 percent for the entire year, indicating that GDP per person will continue to be squeezed.
Normal recessions are accompanied by rising unemployment, but according to the most recent official statistics, the rate of unemployment actually fell last year. It dropped from 4.2% in the spring, to a very small 3.8% in the final quarter. The Office for National Statistics is having issues with their Labour Force Survey, which has led to a warning being attached to the figures. The unemployment rate dropped even though employment growth was subdued.
The job market remains tight and many employers have difficulty in recruiting. The job market’s performance is contrary to the notion that the UK is in a recession. However, it is consistent with a generalized “flatlining” of the economy. Since spring 2022, there has only been a slight increase in employment.
The low unemployment rate is due to the fact that people in working age are becoming less active. In the year to the end last year, the number of working-age (16-64) people who were not active increased by 120,000, or 21,9% of those in this age group. Inactivity in 2019 is almost 700,000 higher than it was before the pandemic.
This is largely due to the rise in people who claim they are not working because of mental health issues or long-term illness. The official figures show that at the end last year 2.8 million people were economically inactive due to long-term illness. This is an increase of 220,000 between 2023 and the past two decades. This is the highest total ever recorded.
The GDP dropped in the last quarter of the year, due to a drop in consumer spending, which was also seen in the quarter before. The recovery hopes for this year are based on the fact that households will spend more in light of falling inflation and rising real incomes.
In recent days, there were two encouraging pieces of news. The first was that, rather than rising along with the energy bill, as had been predicted, inflation remained at 4%, which is a precursor to a fall to the 2% target in spring. The Bank of England has been encouraged to cut interest rates by the weak GDP numbers and this.
Another bit of good news is that retail sales were much better than expected last month. It was expected that they would rebound after a slump of a record 3,3% in December. However, the ground lost in December will not be made up in one leap. The increase was 3.4% for the month. This is the biggest monthly gain since April 2021, when lockdown restrictions were lifted. All retailing sectors, except clothing, showed significant increases.
Treasury’s message ahead of the budget on March 6 has changed. The Office for Budget Responsibility gave the chancellor his second assessment on Wednesday. Since then, it has been clear that Jeremy Hunt has limited room for maneuver in the budget. He will not be able repeat the two-point cut in employee national security (NI) he announced in November’s autumn statement or reduce income tax in a similar manner. The OBR’s estimates can and do change, but they are not always accurate. For example, the OBR may have revised its estimate if the public sector debt percentage as a percent of GDP in the fifth forecast year is expected to decrease.
In determining the future of the public finances, debt interest plays a major role. The interest rate or yield on UK government bonds rose in recent weeks and could make borrowing more expensive. The yield on ten-year government bonds has risen from 3.5 to 3.6 percent in January to 4.1 percent last Friday. The expected decline in inflation will also limit the increase to tax revenue from this source.