The UK economy is stagnating in the fourth quarter and narrowly avoiding a recession

The UK economy was stagnant in the last three months of 2022 – enough to avoid falling into recession for now – but faces a difficult outlook for 2023 as households continue to struggle with inflation exceeding 10%.

The Office for National Statistics said monthly GDP data for December – a month marked by widespread railway strikes and bad weather – showed a contraction of 0.5%, larger than the expected 0.3% decline.

“The economy contracted sharply in December, meaning there was no growth in the economy overall in the last three months of 2022,” said Darren Morgan, the agency’s statistician.

Output fell by 0.2% in the three months to the end of September – when many businesses briefly closed for Queen Elizabeth’s funeral – and a second straight quarter of output decline met the usual European definition of a recession.

However, the pause will likely only be temporary.

Last week, the Bank of England predicted that the United Kingdom would enter a shallow but long recession, starting in the first quarter of this year and lasting five quarters.

Living standards in Britain have been hit by rising inflation, which reached a 41-year high of 11.1 percent in October, and businesses and households will also feel an increasing impact from the rapid rise in interest rates from the central bank since December 2021.

Output in the fourth quarter was still 0.8% below its pre-pandemic level, in sharp contrast to other large advanced economies that have now surpassed their pre-pandemic size.

James Smith, an economist at ING, said he expects the British economy to contract by 0.3%-0.4% in the first quarter of this year, and to a lesser extent in the second quarter.

“A recession, or at least a technical recession, remains the base case,” he said. “But this looks set to be very mild by historical standards, helped of course by the collapse in wholesale gas prices.”

Over the course of 2022 as a whole, the British economy grew by 4.0% after growth of 7.6% in 2021, amid recovery from the historic blow of the Covid-19 pandemic.