UK economy falls into recession, adding to Sunak's election challenge

LONDON, Feb 15 (Reuters) - Britain's economy fell into a recession in the second half of 2023, a tough backdrop ahead of this year's expected election for Prime Minister Rishi Sunak who has promised to boost growth.

Gross domestic product (GDP) contracted by 0.3% in the three months to December, having shrunk by 0.1% between July and September, official data showed.

The fourth-quarter contraction was deeper than all economists' estimates in a Reuters poll, which had pointed to a 0.1% decline.

Sterling weakened against the dollar and the euro. Investors added to their bets on the Bank of England (BoE) cutting interest rates this year and businesses called for more help from the government in a budget plan due on March 6.

Thursday's data means Britain joins Japan among the Group of Seven advanced economies in a recession, although it is likely to be short-lived and shallow by historical standards. Canada has yet to report GDP data for the fourth quarter.

Britain's economy stands just 1% higher than its level of late 2019, before the COVID-19 pandemic struck - with only Germany among G7 countries faring worse.

Sunak promised to get the economy growing as one of his key pledges to voters last year. His Conservative Party has dominated British politics for much of the past seven decades, with a reputation for economic competence. But Labour is now more trusted with the economy, according to opinion polls, opens new tab.

British households are due to see their first drop in living standards between one national election and the next since the Second World War, analysts have said.

Ruth Gregory, deputy chief UK economist at Capital Economics, said the GDP figures had more political significance than economic, with voters due to elect lawmakers in two constituencies on Thursday.

"The news that the UK slipped into technical recession in 2023 will be a blow for the prime minister on a day when he faces the prospect of losing two by-elections," Gregory said.

Finance minister Jeremy Hunt said there were "signs the British economy is turning a corner" and "we must stick to the plan – cutting taxes on work and business to build a stronger economy."

The opposition Labour Party rejected those claims.

"The prime minister can no longer credibly claim that his plan is working or that he has turned the corner on more than 14 years of economic decline under the Conservatives," Rachel Reeves, Labour's top economy official, said.

Media reports said Hunt was seeking to cut billions of pounds from public spending plans to fund pre-election tax cuts in his budget, if penned in by tight finances.

The Office for National Statistics (ONS) said the economy grew 0.1% across 2023 compared with 2022. The BoE forecasts output will pick up slightly in 2024 but only to 0.25% growth.

Britain's economy has been stagnating for nearly two years.

The COVID-19 pandemic triggered the deepest contraction on record over two quarters in early 2020 when the economy slumped by 22%. Before that, the global financial crisis sparked a severe recession that lasted just over a year, from the second quarter of 2008 through to the second quarter of 2009.

Data on Wednesday showed inflation held at a lower-than-expected 4.0% in January, reviving talk among investors about a BoE rate cut as soon as June. But strong wage growth reported on Tuesday underscored why the BoE remains cautious.

Hunt said he was hopeful the central bank could start to cut borrowing costs by the "early summer." Investors were pricing a roughly 68% chance on a first BoE rate cut at its June meeting.

Governor Andrew Bailey said on Wednesday that there had been some signs of an economic upturn in the economy but he still wanted more evidence that inflation pressures were abating.

"While the Bank of England's focus will likely remain on price data, the bigger drop in output and the politics of being in a technical recession will no doubt become uncomfortable," Sanjay Raja, chief UK economist at Deutsche Bank, said.

Economic output fell by 0.1% in monthly terms in December after 0.2% growth in November, the ONS said.

Manufacturing, construction and wholesale were the largest contributors to the decrease in GDP in the fourth quarter.

GDP per person has not grown since early 2022, representing the longest such unbroken run since records began in 1955.