UK avoids recession but 'not out of woods' over inflation

Britain's economy avoided recession after flatlining in the last three months of 2022, but finance minister Jeremy Hunt warned Friday it was "not out of the woods yet" over surging inflation.

Gross domestic product registered zero growth in the fourth quarter, in line with expectations after shrinking 0.3 percent in the previous three months, the Office for National Statistics (ONS) said in a statement.

German GDP in contrast unexpectedly shrank 0.2 percent in the same period as Europe's top economy also battled fallout from the Russian invasion of Ukraine, recent data showed.

The ONS added Friday that the UK economy expanded 4.1 percent last year, shrugging off decades-high inflation, after growth of 7.4 percent in 2021.

Nevertheless, sky-high consumer prices have sparked a cost-of-living crisis in Britain -- and widespread industrial action that weighed on December's performance.

"We are not out the woods yet, particularly when it comes to inflation," Hunt said, but also noted that "our economy is more resilient than many feared".

Persistent inflation 

The technical definition of a recession is two straight quarters of negative growth.

"In December public services were hit by fewer (hospital) operations and ... visits (to see doctors), partly due to the impact of strikes, as well as notably lower school attendance," said ONS economic statistics director Darren Morgan.

"Meanwhile, the break in Premier League football for the World Cup and postal strikes also caused a slowdown."

Bank of England governor Andrew Bailey expressed concern Thursday over persistently high inflation even if the rate of price increases shows signs of cooling.

The remarks to a cross-party committee of MPs boosted the pound on raised expectations of more hikes to British interest rates, analysts said.

"We are concerned about persistence (of high inflation). This is why we (again) raised interest rates," Bailey told the Treasury Committee.

At its most recent regular monetary policy meeting a week ago, the BoE hiked its interest rate for the 10th time in a row as global authorities race to combat runaway inflation.

The bank lifted UK borrowing costs by a half-point to four percent, the highest level since late 2008 during the global financial crisis.

That ramped up mortgage and other loan repayments, weighing heavily on economic activity and worsening the cost-of-living crisis.

UK inflation slowed to 10.5 percent in December -- still around 40-year highs and more than five times the BoE's official target level of two percent.

Central banks the world over are seeking to cool high energy and food prices, fuelled by Russia's invasion of Ukraine one year ago, by hiking interest rates.

Dismal fortunes 

Conservative Prime Minister Rishi Sunak, whose government is partially subsidising energy bills for businesses and households, has vowed to halve UK inflation this year.

Sunak is seeking to turn around his government's currently dismal fortunes before a general election expected next year.

The Conservatives -- in power since 2010 -- are trailing the main opposition Labour party by wide margins, recent polls show, plagued by rampant consumer prices and economic gloom.

The BoE predicted last week that the UK economy would shrink in every quarter of 2023.

The IMF delivered another blow to Sunak when it predicted the UK would be the only G7 country with negative growth in 2023.

"We suspect the drags from high inflation and high-interest rates will trigger a recession this year," cautioned Capital Economics analyst Paul Dales.

The UK suffered the biggest 2020 contraction among the G7 due to the Covid fallout.

The nation is also the only G7 member that has not yet returned to its pre-pandemic state.

British GDP remains 0.8 percent below its 2019 level, the ONS added Friday.

(AFP)