Last month's National Accounts indicated the UK economy contracted by 0.3% in Q4 2023, marking the nation's first entry into recession since the Covid-19 pandemic, following a 0.1% contraction in Q3 2023.
The country is due to release its final fourth-quarter GDP data this week after the first read showed the UK falling into a technical recession in the last two quarters of 2023. The economic downturn may prompt the BOE to expedite rate cuts.
UK Real GDP. Source: Office for National Statistics
A number lower than expected could increase the likelihood that the Bank of England (BoE) accelerates the pace of interest rate cuts this year. Currently, markets anticipate the first BoE rate cut in August, with a total of 72 basis points of cuts projected for 2024.
The Bank of England signaled they were edging toward ending their rate hike campaign later this year in response to diminishing inflationary pressures.
Bank of England Governor Andrew Bailey said the UK is "on the way" to winning its fight against inflation, and officials need not wait for underlying pressures to fully ease before cutting interest rates. In an interview with broadcasters, Bailey said there is still "some way to go" on cooling underlying pressures. But BoE rate-setters must "act ahead of time" on policy moves. This suggests that central bank officials are increasingly relaxed about inflation falling back to the 2% target and can shift toward loosening policy.
UK inflation eased gradually to a two-and-a-half-year low of 3.4% in February and is expected to dip below the 2% target in April.
The UK's decision to leave the European Union shrank the British economy by reducing growth and spurring higher inflation, according to economists at Goldman Sachs, who compared the country's performance to similar nations since the referendum in 2016. The UK has significantly underperformed other advanced economies since the decision to leave the EU.
Prime Minister Rishi Sunak is hoping for early rate cuts to lift the economy out of a shallow recession and boost the Conservatives' electoral chances. Fellow lawmakers, worried the ruling party is trailing the Labor opposition by 20 points in polls, are calling on the BoE to pivot toward lower borrowing costs soon.
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