UK Economic Development Report: Q4 2021

According to an average of 13 economists' estimates compiled by The Wall Street Journal, the gross domestic product (GDP) in the United Kingdom is expected to have fallen 0.1% between October and December compared with the previous quarter. This continuation of the slight contraction booked between July and September would mean that the world's sixth-largest economy fell into a recession, which is typically defined as two successive quarters of declining output. However, economists point out that the very marginal rates of contraction would make this recession historically shallow and largely technical. In a research note, Deutsche Bank economist Sanjay Raja wrote, "It would be fairer to characterize the economy as stagnant." Similarly, Pantheon Macroeconomics' Samuel Tombs stated in a note that the economy should be seen as stagnant rather than in a deep recession.

What to Watch

Household consumption weak at the end of the year

Household consumption, an important component of domestic output, experienced notable weakness at the end of the year. Retail sales declined sharply in December, the key shopping month, thereby dragging down the overall quarterly total. Deutsche's Raja suggests that consumer-facing services likely faced a similar decline. The already bleak consumer landscape was further affected by strike actions.

Prospects for the future amid the gloom

Despite the current gloomy economic situation, there are some prospects for respite in the coming quarters. According to forecasts from the Organization for Economic Co-Operation and Development (OECD) released this month, the U.K. economy is projected to grow by approximately 0.7% in 2024. This places the country around the mid-point among the G7 group of major developed economies. Deutsche's estimates indicate that growth will initially remain stagnant in the first few months of the year but improve thereafter. Raja believes that easier fiscal and monetary policies, coupled with improving supply dynamics, will likely result in a slightly faster expansion of the U.K. economy starting from spring onwards.

Weakness in U.K. Activity Spurs Calls for Bank of England to Cut Interest Rates

The present weakness in U.K. economic activity is raising concerns and prompting calls for the Bank of England to alleviate pressure on the economy by implementing an interest rate cut in the near future. This is particularly relevant in light of the upcoming inflation figures for January, which are set to be published on Wednesday.

If these figures reflect a promising decline in price rises at the beginning of the year, it will further strengthen the case for an interest rate cut.