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London’s Economy Today editorial – February 2024

UK enters recession at the end of 2023

Data published by the Office for National Statistics (ONS) in mid-February showed that the UK had entered a recession in the second half of 2023. After contracting by 0.1% in Q3 2023 GDP fell by a further 0.3% in Q4 2023 (Figure 1). A contraction of GDP in two consecutive quarters of the year is generally taken as a recession. This follows on from poor growth in GDP throughout 2023 with UK output not growing in Q2 2023 and by only 0.2% in Q1 2023. This means that overall, UK GDP only increased by 0.1% throughout the course of 2023. This followed on from post pandemic growth of 4.3% in 2022.

Figure 1:

In Q4 2023 all three main sectors of the economy contracted. Output in the services sector contracted by 0.2% after also contracting by 0.2% in Q3 2023. Output in the production sector fell by 1.0% in Q4 2023 after increasing by 0.1% in the previous quarter. And in construction output declined by 1.3% in Q4 2023 following growth of 0.1% in Q3 2023. The ONS notes that the biggest contributor to the decline in services output came from a 0.6% fall in the wholesale and retail trade, with a “1.3% fall in wholesale trade, except of motor vehicles and motorcycles and a 0.9% fall in retail trade, except of motor vehicles and motorcycles”.

Although this drop in GDP is relatively small other measures of the economy’s growth have also been weak. For example, the growth in GDP per head, the amount of output produced in the UK divided by the number of people in the country, has been declining since Q2 2022 (Figure 1) and declined by 0.7% over 2023 as a whole. This is the longest recorded decline in this measure since records began in 1955.

Commentating on UK GDP Andrew Bailey, the Governor of the Bank of England, said that by historical standards “this is the weakest recession by a long way”. While also saying that there were “distinct signs of an upturn” meaning that the economy may have returned to growth. Some indication to support the view that growth has resumed comes from ONS data on retail sales that saw strong growth in January. Thus, sales volumes increased by 3.4% in January compared to a fall of 3.3% in December.

UK inflation remains steady in January

Despite the UK economy stagnating in 2023 inflation remains well over the Bank of England’s central symmetrical target for Consumer Prices Index (CPI) Inflation of 2%. Thus, after surprisingly increasing in December 2023 (CPI) inflation remained unchanged at 4% in January 2024 (Figure 2)

Figure 2:

However, of the components of inflation most either increased slightly, did not fall or only saw a marginal fall such as goods inflation which fell from 1.9% in December to 1.8% in January. Services inflation increased slightly (from 6.4% in December to 6.5% in January) and the core inflation rate (which excludes volatile energy, food, alcohol and tobacco) stayed steady at 5.1% for the third month in a row. Still analysts expect inflation to drop in the coming months in part due to the announced fall in the energy price cap in April. Ofgem has said that this will decline by 12% and will see a typical household paying £1,690 per year, down from £1,928 at present. Although this remains well above the average household bill seen before the Russian invasion of Ukraine in 2022.

Bank forecasts that inflation may soon temporarily hit its target

Looking forward the Bank of England published its latest Monetary Policy Report at the beginning of February. In this the Bank now expects inflation to fall to around its target 2% rate “within a few months, before rising slightly again” to finish the year at around 2.75%. The Bank noted that recent downward pressures on inflation were “broad-based, reflecting lower fuel, core goods and services price inflation”. Adding that “although still elevated, wage growth has eased across a number of measures and is projected to decline further in coming quarters”.

Looking at GDP, the Bank thinks that its growth “is projected to pick up gradually during the forecast period. That in large part reflects a waning drag on the rate of growth from past increases in Bank Rate. The impact of fiscal policy and relatively weak potential supply growth … pull down on GDP growth throughout the forecast period relative to historical averages. Four-quarter GDP growth recovers to 1½% by the end of the forecast period”. This forecast for improving but historically sluggish UK growth was also supported by the International Monetary Fund (IMF) in their latest World Economic Outlook forecast, which was published at the end of last month. In this they forecast that the UK economy will grow by 0.6% this year (unchanged on their previous forecast in October 2023) before picking up to 1.6% growth in 2025 (a 0.4 percentage points (pp) downgrade on their previous forecast).

World economic growth expected to pick up

The IMF has been improving its forecasts for the world economy with it expecting the global economy to grow by 3.1% in 2024 (a 0.2pp upgrade on its October forecast) and 3.2% in 2025 (unchanged on its previous forecast). They did observe that these growth rates are below the 3.8% historic average seen for the world economy between 2000-19. While further noting that “…important divergences remain. We expect slower growth in the United States, where tight monetary policy is still working through the economy, and in China, where weaker consumption and investment continue to weigh on activity. In the euro area, meanwhile, activity is expected to rebound slightly after a challenging 2023, when high energy prices and tight monetary policy restricted demand”.

International visitor numbers to London return to pre-pandemic levels

By the third quarter of 2023 international visitor numbers to London were 95% of their pre-pandemic levels for the corresponding quarter of 2019, according to the ONS. (This measure removes seasonal variation in tourism.) Visitor nights were 27% higher, while spend (after inflation) was 12% lower. This compares with the first and last quarters of 2021 when visitor numbers were under 3% of pre-pandemic levels, (Figure 3). The sharp rebound in tourism in 2022 has been consolidated in 2023, although there is some volatility in trends compared with the corresponding quarter in 2019. In support of this, Heathrow monthly passenger statistics provide a similar picture in that numbers returned to pre-pandemic levels in 2023 Q3, and have remained there up to January this year.

Figure 3:

At a more granular level tourism from North America is above pre-pandemic levels. Visits and spend by Europeans are lower than before, although nights are higher. Business nights overall have plateaued, and European business nights remain weak. Business spend has not returned to pre-pandemic levels for both Europe and North America. This suggests that developments in communication technology are reducing the need for business travel, and that reduced access to the European market after Brexit is having an effect.

Big business groups have expressed the concern that the scrapping of VAT-free shopping for international visitors to the UK has placed the UK at a competitive disadvantage compared with other shopping destinations across Europe. Jeremy Hunt, Chancellor of the Exchequer has asked the Office for Budget Responsibility (OBR) to investigate the Exchequer revenue implications. The OBR will report back alongside the Budget on 6 March.

Bankers, lawyers and consultants more exposed to trade shocks

The Resolution Foundation published new research in February looking at Britain’s exposure to trade shocks. The report observed that historically manufacturing has been most exposed to globalisation. Although manufacturing jobs in the UK economy have declined, increasing trade in other sectors of the economy have made these sectors more exposed to disruption from international competition. The report therefore notes that the “rise in trade openness means that jobs across industries are now more trade intensive and exposed to shocks”. Adding that “the UK’s shift towards tradeable professional services such as accountancy and banking – key areas of Britain’s comparative advantage, which are concentrated in cities – mean that these high paid workers are now 18 per cent more exposed to trade today than they were in the early 2000s”. This trade exposure has shifted from competition from imports into the country (as was the case for manufacturing) to shocks to the demand for UK’s exports. In particular “the risk Britain faces today is less about domestic goods being replaced by cheaper overseas alternatives, and more about falling foreign demand for the services we sell overseas”.

GLA Economics will continue to monitor these and other issues affecting London over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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