Britain suffers its longest fall in living standards since records began

Shadow chancellor Rachel Reeves said it was a «Rishi recession, but people are paying for it». Photo: Holly Adams/Bloomberg

The UK's economy is in recession, the worst hit on record, according to official data showing the economy.

The Office for National Statistics (ONS) reported that output per capita fell sharply at the end of last year. This means the economy has not grown since the start of 2022 after accounting for population growth.

This is the longest period of falling or stagnant living standards since records began in 1955, as economists warned it was the first technical recession since 2020. hiding a much deeper decline in living standards.

A fall in so-called GDP per capita contributed to an overall economic contraction of 0.3% in the final three months of 2023, a blow to Rishi Sunak as he prepares for a general election this year.

The decline was much larger than analysts had forecast and followed a 0.1% fall in the previous three months. It means the UK has fallen into its first technical recession since the economy was locked down four years ago.

GDP per capita, which measures economic growth adjusted for population size, is seen as a good indicator of living standards because when an economy generates more value per person each year, it typically results in higher household incomes.

Grant Fitzner, chief economist at the ONS, said: «What matters for living standards and ultimately things like public sector finances is whether the population grows in line with changes in population size.»

Mr Fitzner also warned. that economic inactivity was the main factor holding back growth. The UK remains the only G7 country that has not yet returned to pre-pandemic employment levels.

He said: “If more people worked, consumed and produced, we would have a higher GDP. The fact that economic activity fell significantly after the pandemic and only partially recovered is one of the factors behind weaker growth. Obviously, this will also help reduce consumer spending as fewer people work and spend money.”

The data also shows the economy barely grew in 2023, expanding just 0.1% for the full year.

Excluding the pandemic, this is the weakest annual growth since the 2009 financial crisis.

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James Smith, research director at the Resolution Foundation, said: “Overall, the UK remains a country in a state of stagnation, with very little sign of a recovery that will lift the economy out of this state.”

Weaker growth suggests the Bank of England may be forced to cut interest rates faster to support the economy. However, Megan Green, a member of the Bank of England's board of directors, warned on Thursday that there is no guarantee it will cut interest rates when inflation falls to 2%. Ms Green said the reduction in consumer price growth to the Bank's 2% target was not enough to «declare victory» and begin to reduce borrowing costs.

Statisticians said the quarterly fall was driven by widespread recessions across the world. economic sectors, including a 0.2% drop in service production and a 1.3% drop in construction over the last three months of the year. Housebuilding has been in the doldrums for more than a year.

The ONS said a significant decline in retail sales in the quarter hit the economy on the back of a disappointing Christmas season, which saw households increase their gift buying to take advantage of November's Black Friday deals.

People are also spending less money on goods. hair and beauty treatments over the Christmas period, says the ONS.

There is evidence that more parents are taking their children out of school earlier than the holidays, highlighting ongoing concerns about attendance after lockdown.

The figures mark the end of a major economic data week for the Prime Minister, during which inflation remained stable but rising infections continued to hurt the economy.

It comes as Jeremy Hunt prepares to present his Budget next year month. The Telegraph reported in January that the Chancellor was prepared to cut departmental budgets further to make room for tax cuts amid a worsening economic backdrop.

A fall in output in the latest quarter suggests the Office for Budget Responsibility, the government's economic watchdog, is likely to cut its forecast for growth of 0.7% this year.

Rachel Reeves, the shadow chancellor, said -n Sunak's economic plan is now «in tatters» as the prime minister failed to deliver on his promise to boost the economy.

She added: «This is a Rishi recession and people will pay for it.»

Mr Hunt insisted there were «signs that the British economy is turning the corner». He added: “Forecasts agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are falling and unemployment remains low. While times remain tough for many families, we must stick to the plan to cut taxes on work and business to build a stronger economy.»

Separate data from the European Commission suggests the German economy will grow more slowly than This is expected to be a blow to Chancellor Olaf Scholz this year.

The commission cut its forecasts for German economic growth by more than half, from 0.8% to 0.3% in 2024.

< p>It warned that high interest rates, labor shortages and weak confidence were holding back growth in Europe's largest economy.

The commission also said escalating conflict in the Middle East could throw the fight against inflation at a critical juncture.

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Further disruptions from Houthi attacks in the Red Sea “could lead to further strains on supply chains, hamper production and increase pricing pressure,” the company said in its winter forecast.