Recession squeeze will help cut inflation, Hunt believes

Britain’s economy has slipped into recession after an economic squeeze that Jeremy Hunt said was needed to tackle high inflation.

GDP shrank in the second half of 2023 following multiple hikes in interest rates, meeting economists’ definition of a “technical recession”.

Ministers are confident the economy will start growing again in the run-up to a general election, but Labour has accused the Conservatives of leading the UK into “a spiral of economic decline”.

Output shrank by 0.3 per cent in the final quarter of last year, following a decline of 0.1 per cent in the third quarter and capping off a year of near-zero economic growth.

The recession has been attributed to the Bank of England’s decision to raise rates aggressively in order to curb demand in the economy and push down inflation, as well as tight fiscal conditions designed to bring down borrowing and other factors such as strikes.

The Chancellor believes that the squeeze was a necessary part of reducing inflation from its high of more than 11 per cent to the current level of 4 per cent, ensuring that average incomes are now growing again in real terms.

A Treasury source said: “Inflation reduction has always been the priority and it’s the reason last year we took a lot of political flak for not cutting taxes. Interest rates are the tool to bring down inflation and it has worked.”

Mr Hunt told the BBC that his economic strategy was working, saying: “Our plan has been to tackle inflation. First and foremost, that does mean higher interest rates. It’s the right thing to do for families because when they see the cost of their weekly shop go up, their energy bills go up, the cost of filling up the car going up, that creates real pressure.

“And until you relieve that pressure on families, we’re not going to see healthy growth, and when it comes to that battle against inflation, we are making much faster progress than many people predicted.”

Last year, Mr Hunt suggested in an interview he would be “comfortable” with a recession if that was the only way to cut inflation, although he also emphasised he was hoping for economic growth.

Rachel Reeves, the shadow Chancellor, rejected the suggestion that the shrinking economy was due primarily to the fight against inflation, saying: “I don’t buy this argument that you needed to have a recession to get inflation down – other countries are doing an awful lot better at controlling inflation whilst also managing to grow their economy.”

She told a press conference in Westminster: “It is absolutely clear that Britain remains trapped in a spiral of economic decline. This isn’t a question of lines on a graph. It’s about the health of our high streets, about growing businesses, secure, well-paid jobs, and money in the pockets of working people.”

Business groups warned that firms remained under pressure as a result of higher costs, weak demand from consumers and labour market shortages which make it hard to hire new workers.