Finance

U.K. Economy Sputters and Barely Avoids a Recession

The British economy narrowly avoided a recession at the end of last year, data published on Friday showed, but it is still smaller than it was before the pandemic, and economists predict that it will take several years for Britain to make up that lost output.

Gross domestic product was unchanged in the fourth quarter of 2022, after declining 0.2 percent in the previous quarter, according to the first estimate by the Office for National Statistics on Friday.

That stagnation means Britain escaped two quarters of negative growth, which can be technically defined as a recession. The economy was 0.8 percent smaller than it was at the end of 2019.

Overall in 2022, the British economy grew 4 percent, a slowdown from 7.6 percent growth in 2021, when the country emerged from pandemic lockdowns, the statistics agency said on Friday.

Like the United States and the eurozone, Britain’s economy fared better than expected at the end of last year. Businesses and households have been surprisingly, though not uniformly, resilient to high inflation, and Europe has benefited from a drop in wholesale natural gas prices, partly because of warmer weather and success in building up stores of natural gas.

But these economies are all expected to slow significantly this year as the impact of higher interest rates, imposed to tackle the fastest pace of inflation in generations, takes hold.

Still, Britain has the distinction of being the only major economy forecast to be in a recession this year, according to the latest projection by the International Monetary Fund.

A downturn began in December, when the economy contracted quite sharply, declining 0.5 percent, partly because of fewer doctors’ appointments and operations, as well as numerous strikes and other labor walkouts, and the fact that soccer’s World Cup brought a temporary halt to Premier League matches. This offset the growth in October and November, the statistics agency said.

Last week, the Bank of England said it expected the economy to shrink by half a percent this year, as persistent inflation restrains consumer spending and high interest rates push up mortgage costs, further squeezing household budgets. Consumers will face higher energy bills when government interventions are reduced, and the fastest pace of food inflation in four and a half decades.

It’s a notable upgrade from the bank’s forecast in November, when it expected a contraction of 1.5 percent.

Britain is expected to experience only a shallow recession, far less severe than the one after the 2008 financial crisis or in the early 1990s, because unemployment is forecast to increase less than previously thought and traders anticipate that interest rates will not rise much higher. In fact, the National Institute of Economic and Social Research, a London think tank, presented a report this week arguing that Britain could entirely avoid a recession this year, though the economy will hardly grow.

In the end, whether Britain falls into a recession or not may seem like splitting hairs. The bigger problem is that after years of disappointing expansion, the economy faces more years of lackluster growth because of weak productivity and a smaller work force. The Bank of England said that it didn’t expect the British economy to return to its prepandemic size before 2026.

The economic frustration at the rising cost of living and history of low pay can be seen in streets as workers including nurses and teachers go on strike over pay and strenuous labor conditions. The National Institute of Economic and Social Research has warned of the return of the “squeezed middle,” a large middle class facing higher taxes, mortgage costs and other expenses without the cash transfers received by low-income households.

Successive economic shocks — including the pandemic, and rising energy prices because of Russia’s war in Ukraine — have made Britain poorer, but there is also“frustration and disappointment” among people because foryears the economy has performed worse than expected,Jagjit Chadha, the director of the National Institute of Economic and Social Research, said in a news conference this week.

The shortfall in per capita gross domestic product, compared to its pre-financial crisis trend, is “an incredibly depressing picture,” he said.

After the economic turmoil last autumn under the premiership of Liz Truss, which temporarily caused debt costs to soar and the British pound to plummet, there is also a growing concern that the government led by Prime Minister Rishi Sunak doesn’t have a credible strategy to sustainably expand the economy. Meanwhile, the economic cost of Brexit, Britain’s departure from the European Union three years ago, is growing more apparent. And there are fears that the country will be left behind in the green transition if it doesn’t do more to compete with the U.S. Inflation Reduction Act, which is set to draw billion of dollars in investments to the United States.

The National Institute of Economic and Social Research argues that Britain needs much more public and business investment.

“There is the potential there for us to actually grow,” Stephen Millard, the institute’s deputy director, said this week, but “we have to invest, and that’s what we’ve been horrendously bad at.”

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