We now know Britain sank into a technical recession in the second half of 2023. As recession is a known side effect risk of monetary tightening, could this mean the Bank of England will hurry up with its first cut? Some observers have argued that this state of negative growth strengthens the case for cutting early given the risk the recession will deepen. Only one member of the Monetary Policy Committee, Swati Dhingra, thinks so too. Her view is that the outlook for headline inflation is “bumpy but downwards” and that there are downside risks to living standards from keeping policy tight.
But it’s unlikely the confirmation of recession has increased the chance of a Bank of England rate cut to the current level of 5.25 per cent before or even by June.
First, while all three main sectors contracted, the recession is about as light as can be, as Andrew Bailey noted this week. The economy shrank by 0.3 per cent in the three months to December and by a mere 0.1 per cent in December. Economists are therefore labelling it a technical recession, pointing out that in the US the decline would need to be much greater to qualify as a recession. “The broader economic picture,” says Kallum Pickering at Berenberg, “is not consistent with a typical recession.”