Should we be worried by the ‘Rishession’… and is Brexit to blame?

Economists spent much of last year discussing the dreaded R-word, and whether the UK could avoid recession. Now we have the answer: it could not.

Following a shallow contraction in the third quarter of 2023, figures from the Office for National Statistics (ONS) show that UK plc fell on its face during the final three months of the year.

Every sector – services (down 0.2 per cent), construction (-1.3) and production (-1) – ended 2023 in the red. Economists had expected a stumble, but not as bad as the one that emerged. The UK entered 2024 trying to pull itself back to its feet and in need of Band-Aids for its scraped knees.

After the profound and protracted squeeze on living standards, thanks to the inflation spike, something was always going to give and so it has proved. Retail and wholesalers created the biggest drags on the economy at the end of the year. There have been many spells when the British consumer has, in effect, bailed UK plc out. It didn’t happen this time.

But how much does this “short, technical recession” really matter? Andrew Bailey, the governor of the Bank of England got in early, and for days has been playing down its significance. Anticipating what emerged today, he said on Monday: “I would not put too much weight on that. If we do get two successive negative quarters (the technical definition of a recession) what I would put more weight on is that the indicators we have seen since have shown some signs of upturn.”

Of course, Bailey has skin in the game here. The Bank’s rate setting Monetary Policy Committee, on which he serves, is facing pressure to reduce interest rates. Small businesses, in particular, are screaming. The high cost of the credit they use to finance their operations after 14 consecutive rate rises (before the recent pause) acts like a lead weight on everything they do.

Reducing rates would give the economy a much-needed leg-up. But Bailey and his colleagues don’t think the inflationary dragon has been truly slain, even though the headline rate is expected to fall quickly over the next couple of months and could be back to the Bank’s hallowed 2 per cent target in April.

Politically, it is more significant still. This could not have come at a worse time for Rishi Sunak, with an election looming ever larger. His opponents will seek to pin the blame for the downturn on him – it’s already been branded the ‘Rishession’… – and use it as a stick to beat the Tories’ record on the economy. The latter is always a key battleground. In past epochs, it has been seen as a Tory strength. This time, not so much.

While chancellor Jeremy Hunt did his best to calm nerves with his oft-repeated “stick to the plan” line and, like Bailey, talk of the economy turning the corner, critics have pointed out that the headline numbers actually underestimate the extent of the economic malaise.

The UK has a growing population. By importing more people, the economy has more constituent parts. If we divide it among those parts, we get per-capita GDP, which is the better measure when it comes to those all important living standards. Despite the end of year downturn, the British economy managed to cough and wheeze its way to 0.1 per cent growth across the course of 2023.

But the Resolution Foundation notes that per-capita GDP fell by 0.7 per cent over the same period, and hasn’t grown since the first part 2022 – the longest run of decline or stagnation since 1955.

“Britain remains a stagnation nation, with GDP per capita over the past 15 years (1.2 per cent), more than halving compared to the previous 15 years (2.8 per cent),” it pointed out in a wintry assessment of the economic backdrop.

What’s changed over those 15 years? There are, obviously, multiple challenges that have emerged, not least the energy price and inflation shocks that weren’t evident during the previous 15 years the think tank looked at.

Another strong headwind faced by the UK economy is, of course, (whisper it) Brexit. Goldman Sachs – Rishi Sunak’s old shop, remember – said recently that Brexit has saddled the nation with lower growth and higher inflation. The Structural and Cyclical Costs of Brexit, by James Moberley and Sven Jari Stehn, puts the hit at 5 per cent of GDP, a chunky number amounting to billions upon billions of pounds of lost income.

That estimate is in the same ballpark as that of the Centre for European Reform, where John Springford uses an algorithm to identify a “doppelgänger UK” that never left the EU, and then compares it with where we are now: “Brexit has blown a sizeable hole in Britain’s economic model,” he concluded, “and major reforms are needed to recover lost ground.”

Indeed so. You don’t really need a sophisticated algorithm to see that taking a country out of the world’s biggest single market and replacing it with a bare-bones trade agreement is going to cause damage.

Brexiteers continue to argue that the benefits will overcome this over time. So where are they? Do we have any signs? Anyone? Anywhere? When will we see them?

Even if the UK picks up a bit this year, as expected, no one is forecasting a sudden transformation into a foggy Asian tiger anytime soon. Growth is expected to be torpid at best this year, and next. Investment would help a lot, both from the public and private sectors. This should be an incoming government’s priority, as well as fostering a better relationship with the continent.

But back to that recession. Think of it as an uphill climb on the way home against a strong wind. If you’ve lived anywhere with hills, you’ll know what I mean. Brexit makes that wind much stronger than it would otherwise have been. You expend much more energy fighting against it than you otherwise would.

Our leaving the EU might not be the cause of our latest recession. But it’s making it harder to escape it – and we’ll be battling against it as we climb that hill every day.