Britain avoids recession, but remains mired in a living standards downturn

The UK economy unexpectedly grew at the end of last year, despite the Bank of England predicting last week it would be in recession territory. But GDP per capita – which closely tracks disposable income growth – is still lower today than it was before the pandemic, the Resolution Foundation said today (Thursday).

Having grown by 1.1 per cent during the first half of 2024, GDP growth has slowed to just 0.1 per cent during the second half of the year – the sharpest slowdown outside of the pandemic since 2010.

The marginal growth at the end of last year (Q4 2024), driven by an eyebrow-raising level of services-led growth (0.4 per cent growth) in December, beat market expectations and the Bank of England’s forecast. But Britain’s living standards downturn is still ongoing, with GDP per person still below its pre-pandemic level (Q4 2019) – by 1.1 per cent.

The Foundation adds that the UK is not alone is experiencing a living standards downturn – GDP per capita is also below eve-of-pandemic levels in Germany and Canada (both by 1.7 per cent). But had the UK economy experienced G7 average growth over this period (3.2 per cent), annual GDP per capita would be £450 higher today.

With business and consumer confidence remaining low, the Chancellor faces both an economic challenge, and a fiscal one too. A weaker economic outlook from the Office for Budget Responsibility next month, who predicted growth of 0.7 per cent over the second half of 2024 versus 0.1 per cent in reality, could leave the government at risk of missing her fiscal rules.

Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“Better than expected growth at the end of last year means that Britain has avoided another technical recession. But it remains mired in a living standards downturn, with GDP per person still below pre-pandemic levels.

“In recent weeks, the Chancellor has set out welcome plans to boost longer-term growth, but short-term action may be needed to get the economy out of its current slump. And with the Government constrained by its fiscal rules, which the Chancellor is already at risk of missing next month, many will be hoping the Bank of England can ride to the rescue with faster interest rate cuts.”