"High interest rates + low growth 'double-kill' Britain's economy plunges into recession cliff again"

The UK economy is facing severe challenges, with the possibility of a second consecutive contraction in the fourth quarter, pushing the UK to the edge of a recession. Economists estimate that the UK Gross Domestic Product (GDP) declined by 0.1% in the third quarter due to the impact of Chancellor Rishi Sunak's tax-raising budget. Surveys show that the start of 2025 has been slow, and the Bank of England estimates that there is a 40% chance that the UK has already slipped into a technical recession (two consecutive quarters of contraction), which would be the second time in over a year. Prior to the official release of the new forecasts, the return of stagnant economic growth and pressure on living costs have further exacerbated the issues facing Sunak. The Office for Budget Responsibility expects to follow the Bank of England in lowering economic forecasts, increasing the possibility of Sunak having to cut public services or welfare spending to avoid violating fiscal rules. Currently, the UK is in a dilemma: government borrowing costs are similar to the rapidly expanding US economy, but the growth rate is closer to the struggling Eurozone. The European Central Bank has lowered interest rates in the Eurozone well below UK levels, presenting a unique challenge of ensuring fiscal stability for Sunak. Investors are concerned about high government debt levels, as the UK government debt as a percentage of the economy has reached its highest level since the early 1960s. According to EY's ITEM Club calculations, the UK's borrowing costs relative to its nominal growth rate are higher than those of most advanced economies. Ruth Gregory, Deputy Chief UK Economist at Capital Economics, said: "Unless the government manages to reduce the large primary deficit, the markets' concerns about the sustainability of public sector debt could intensify. This means there is little room for complacency." The primary deficit refers to the funds the government needs to borrow to finance its spending, excluding debt interest costs. The UK Office for National Statistics will release GDP data for the fourth quarter on Thursday, along with the latest estimates for December. Bloomberg Economics estimates that output was stagnant that month, with the economy smaller than it was when the Labour party took office seven months earlier. Consumers and businesses continue to be affected by the announced 40 billion (about $49.5 billion) tax hikes and threats from US President Donald Trump's tariffs on the global economy. Economists Dan Hanson and Ana Andrade expect a mild recovery in the UK economy in the first quarter driven by government spending, but they do not rule out the possibility of an economic recession. They wrote: "Recent weaknesses have been surprising, and economic activity may continue to disappoint. This could lead to a technical recession in the winter, giving the central bank reason to reconsider its gradual rate cuts." Notably, the Bank of England announced its third rate cut last week since August, setting a pessimistic tone for the market. The central bank predicts a 0.1% contraction in the fourth quarter, cuts its 2025 economic growth forecast in half to 0.7%, and forecasts higher inflation than previously expected, mainly due to rising energy prices. Bank of England Governor Andrew Bailey hinted at adopting a "gradual and cautious" approach to further rate cuts, with the money markets expecting only two to three more rate cuts this year. If the Labour party is to fulfill its election promises of restoring public services and increasing investment, economic growth is crucial. Last month, Sunak pledged to build new wind turbines, roads, airports, railways, and trade agreements to revive the struggling economy, but economists warn that these projects will take time to materialize. The chancellor faces a reckoning as the Office for Budget Responsibility assesses the economic situation in preparation for her Spring Statement on March 26. According to reports on Tuesday, fiscal oversight agencies have lowered their growth forecasts, with early forecasts released last week indicating that Sunak will face a small deficit. Downgrades in credit ratings and bond market volatility have led to an increase in borrowing costs since October, erasing the meager gains of 9.9 billion left from violating the rule that daily expenditure must be paid for with tax revenues. Sunak now faces the prospect of having to cut spending as she stated that she will not raise taxes temporarily following strong business opposition to the budget. The UK faces a dual challenge of high interest rates and low growth: the UK's 10-year bond yield is around 4.5%, similar to the US, but with a significant difference in growth rates. Last year, driven by consumer spending, the US economy grew by nearly 3%, while the Bank of England estimates the UK economy grew by only 0.7%, matching the Eurozone until 2026. Peder Beck-Friis, an economist at PIMCO, stated last week during a hearing on the UK's debt situation in the House of Lords Economic Affairs Committee: "One prominent variable in the UK is R minus G (interest rate minus growth rate), and we have been talking about this variable. Compared to the UK's growth rate, only Italy has higher borrowing costs."