Is the UK about to follow Germany into recession?

Jeremy Hunt has said he is comfortable with the UK entering recession so long as it eases inflation. Credit: PA

By Lewis Denison, ITV News Westminster Producer

Germany has entered recession and it appears the UK may not be far behind.

The German economy shrank unexpectedly in the first three months of this year by 0.3% - marking its second consecutive quarterly contraction after shrinking by 0.5% in the last three months of 2022.

It means the country has been "by far the worst performer among major eurozone economies over the past two quarters", according to senior Europe economist Franziska Palmas from Capital Economics.

But the decline of Europe's biggest economy could be a worrying sign for the rest of the continent and perhaps globe.

High inflation and interest rates are said to be the cause of Germany's recession but both measures are much higher in the UK.

Chancellor Jeremy Hunt has even said he doesn't mind the UK falling into recession so long as it means inflation eases - so what does this all mean?

What is a recession and does it matter?

Economies usually grow because incomes tend to rise along with the value of goods and services produced by that country - also known as Gross Domestic Product (GDP).

When GDP starts to fall, it is a signal that a country could be heading for a recession.

There are various definitions of a recession but the GDP of a country shrinking for two consecutive quarters is perhaps the most commonly used metric.

A growing economy is good for people and businesses as it means there is more money to go around. The opposite is the case when a country is in recession.

Less money in the economy means businesses could chose to lay off staff to save cash and governments have less to spend on. So the general consensus is that growth is good and recessions are bad.

Is the UK heading for a recession?

There have been lots of encouraging signs lately that the UK will defy expectations and avoid a recession, but comments from Chancellor Jeremy may cause concern.

Despite a forecast from the International Monetary Fund that the UK economy will grow by 0.4% this year and the Bank of England's prediction that GDP will rise by 0.25%, Mr Hunt is still refusing to rule out a recession.

That's because there is strong speculation that the Bank of England could soon raise interest rates for the 13th consecutive time from its current level of 4.5% to above 5.25% before the year is out - a move which could push the UK further toward recession.

Asked whether he was "comfortable with the Bank of England doing whatever it takes to bring down inflation, even if that potentially would precipitate a recession", he told Sky News: "Yes, because in the end, inflation is a source of instability.

"And if we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take."

But, in an update to recent forecasts on Wednesday, the IMF said: “Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.”

It's predicting growth for the UK stronger growth than Germany but still weaker than Italy, France, Japan, Canada or the United States - so London may not be following Berlin into decline afterall.

UK stock market under threat by debt talks in US

The FTSE 100 Index has continued its downward spiral after hitting a two-month low on Wednesday.

The index is affected by news in America and sank a further 0.74% on Thursday as the US debt ceiling debate rumbles on.

The debt ceiling is the amount of money the US allows itself to borrow in order to cover its spending. It does not produce enough revenue to pay its bills so borrows cash and negotiations are underway to raise the limit.

But talks between lawmakers are in deadlock and if an agreement cannot be reached the US could default on its payments as soon as June 1.

If the US fails to meet its financial obligations it could slip into a recession, which could send global economies spiralling.

It is however highly unlikely that the US will default and a deal on the debt ceiling is widely expected to be reached.

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