World’s 6th largest economy likely in recession—what it means for U.S.
The U.K., the world’s sixth-largest economy based on GDP, has likely entered into a recession, according to a new analysis by Bloomberg.
Research undertaken by Bloomberg economists Dan Hanson and Andrej Sokol suggests there’s a 52% chance the U.K. entered a mild recession in the second half of 2023.
The technical definition of a recession is back-to-back quarters of negative GDP growth.
“It will be a close call between stagnation and a mild contraction, but the odds are tilted marginally in favor of the latter,” Hanson wrote in a research note published Nov. 6.
“The risks are that the fall in output is a little sharper than we have penciled in,” he said.
The economists attribute the mild recession to a souring job market and rising interest rates—factors they said would impact consumer spending.
“With the labor market loosening, consumers may feel more cautious about spending,” Hanson wrote.
While the U.K. may be further along in its recessionary path, it’s not the only country struggling with rising inflation and a weakening job market.
The dangers facing consumer-led economies
Consumer spending accounts for almost 63% of the U.K.’s economy, according to data provider CEIC. But in the U.S., this figure is around 68%.
Like the U.K., the U.S. faces an uphill battle after the Fed raised interest rates to 5.5%. A higher federal funds rate has elevated borrowing costs on everything from auto loans to credit cards and mortgages.
So far, consumer spending in the U.S. has been resilient and was one of the biggest contributors to the economy’s 4.9% annual growth pace last quarter.
But economists warn the momentum won’t last as higher rates take their toll.
According to Fitch Ratings, a top-three U.S. credit rating agency, consumer spending will likely slow to a 1.2% annualized rate in the fourth quarter before contracting at the start of 2024.
Like its British counterpart, the U.S. labor market is also running out of steam—and that’s bad for consumer spending.
U.S. employers added 150,000 workers to payrolls in October, marking the weakest pace of hiring since June. The unemployment rate is also up half a percentage point from its April low to sit at 3.9%.
U.S. recession odds fall, but growth outlook remains dismal
Although several economists have lowered the odds of a recession, the U.S. economy still faces a grim outlook, especially in the short term.
The International Monetary Fund is calling for U.S. GDP growth to slow to 1.5% in 2024 from an already mediocre 2.1% in 2023. Even the Congressional Budget Office in Washington forecasts the economy to increase by just 1.5% next year.
And there’s no guarantee that recession is avoidable, either.
A recent survey of more than 70 economists by The Wall Street Journal signaled a 48% chance of a recession in the next 12 months. In their view, the only thing standing in the way of a downtrend is the Fed, which is likely finished raising interest rates for now.
But the Fed hasn’t ruled out the possibility of further rate hikes, with Chairman Jerome Powell leaving the door open to additional increases, possibly as early as next year.