The UK Recession is Worse than You Think

In 2022 alone, the UK dealt with a housing crisis , an energy crisis, a potential water crisis , long NHS waiting lists , which all summed into a cost-of-living crisis.

This made British Prime Minister Rishi Sunak's promise to “grow the UK economy” at the start of 2023 an important one to keep.

Last week, the report card for the British economy in 2023 came in and it wasn't pretty. The economy shrank in the 2nd half of 2023, which fits the technical definition of a recession (2 consecutive quarters of negative GDP growth).

Unlike the US , the UK does not have any special rules on what determines a recession. All it takes is 2 consecutive quarters of negative GDP growth and that criterion has been met.

How can the UK's situation be worse?

While a recession focuses on changes in GDP, the average person in an economy should be more interested in GDP per person and on this metric, the UK has been declining for some time now.

While GDP matters, GDP per capita matters more

GDP per capita also known as GDP per head gives a clearer picture of the average economic well-being of individuals in a country.

While GDP measures the total value of all goods and services produced in a country, GDP per capita divides that value by the population.

GDP per head helps us better understand how the overall economic growth translates to the individual and assess the general prosperity of the population.

If GDP is rising but the population is rising such that GDP per head is falling, it is a bad thing. But if GDP is falling while GDP per head is rising, it could be a good thing.

What matters is not how much activity there is in a country but how each person benefits from that activity.

While the UK's GDP was down 0.1% and 0.3% in Q3 and Q4 2023 respectively, and up 0.1% for the full year 2023; the GDP per head story is much much worse. GDP per head fell in every quarter of 2023 and was down 0.7% over 2023 as a whole.

The picture is the same even when viewed over a longer timeframe. Over the last 20 years, while UK GDP has grown a meagre 1.39%, GDP per head has grown even slower at 0.71%. This is 70% lower than in the previous four decades !

The UK may have the 6th largest economy in the world by GDP. But on GDP per head, the UK is closer to the 20th!

The Resolution Foundation?think-tank estimated that the fall in GDP per capita since the cost-of-living crisis started is equivalent to a loss of nearly ￡1,500 per household. It also estimated that this was the longest run of stagnation or fall in GDP per head since 1955!

Before you think it is a population issue and tout the migration rhetoric the current ruling party is pushing in the UK, see the below.

Some Treasury insiders admit that if it had not been for a big influx of migrants (net migration hit a record 745,000 in 2022), the headline GDP figures would have been even worse!

Back to GDP

Another worrying aspect of the GDP data is both real and nominal GDP fell for the UK. The fall in nominal GDP means that even when inflation (which is currently 2 times normal in the UK) is included, the output from the UK fell. The fall in real GDP means the quantity or quality of goods and services deteriorated over the period. Both happening concurrently is quite troubling.

Could this be a head fake?

"This recession is as mild as they come and timely indicators suggest it is already nearing an end" - Ruth Gregory, Deputy chief UK economist, Capital Economics

If the US had the same GDP data (minus the per head part) this wouldn't be called a recession because the labor market is still strong.

The US entered a technical recession in 2022. But as we have now learned, that turned out to be a head fake or to borrow some famous last words, "transitory". Some economists argue the UK recession will be a mild/shallow recession. Time will answer this question. Be that as it may, there is the more concerning issue of GDP per capita which has been declining for some time now which the country needs to address.

Rishi's Recession

Too bad for Prime Minister Rishi who will have the "R" word hanging around his neck until at least May, when the next quarterly GDP figures are released, unless last year’s figures are revised upwards in the meantime.

My hot take is this outcome would probably have remained the same even if the opposition party was in power. While opposing politicians love to blame ruling party for negative economic realities, this one is probably not one situation that Sunak can fairly take all the blame for.

In some good news, retail sales in the UK jumped 3.4% in January which was the biggest monthly increase in nearly 3 years.

Final Thoughts

While the UK recession could be a head fake like the US' technical recession of 2022 or could be shallow like many economists are expecting, the GDP per capita situation seems to be an underlying problem that the UK needs to get on top of. Considering the restrictive migration policy, and other Brexit shoes left to drop, the outlook for the UK doesn't seem particularly exciting.

It's not a great time for Great Britain.