The fourth quarter economy was weaker than expected as GDP shrank 0.3 percent versus the previous period, some 0.2 percentage points more than anticipated. Following an unrevised 0.1 percent dip in the third quarter, the latest decrease means that the UK ended 2023 in technical recession.

The quarterly decline was in part due to the household sector where spending dipped 0.1 percent after a 0.9 percent drop in the third quarter. This was compounded by a 0.3 percent fall in government consumption. However, more optimistically, gross fixed capital formation rose 1.4 percent, reversing its third quarter decline and within which business investment expanded 1.5 percent. Business inventories (excluding alignment and balancing) added 0.3 percent.

Consequently, growth would have been more robust but for a renewed deterioration in the foreign trade balance. Here a 2.9 percent drop in exports easily outpaced a 0.8 percent slide in imports which, combined, subtracted 0.6 percentage points.

The onset of recession will not come as much of a surprise to the BoE or financial markets. Still, ahead of a probable general election later in the year, confirmation of the downturn will add additional pressure on the BoE to deliver a near-term cut in interest rates. That said, with inflation persistence still an important issue for many MPC members, the March meeting still looks too early and better news on prices will be needed if Bank Rate is to be lowered in May. Today's updates put the UK RPI at minus 8 and the RPI-P at 12. Neither measure is especially far away from zero, but the bottom line is that the UK real economy is slightly outperforming market expectations while inflation news has been on the soft side.

Fourth quarter GDP is seen dipping 0.1 percent versus the previous quarter which, absent any revisions, would put the economy is a mild recession.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Since 2018, the first, or provisional, estimate includes the GDP expenditure components as well as data on the main output sectors. These results are updated in the second, and final, report.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. These data are readily comparable to other industrialized countries. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.

Currency traders prefer healthy growth and higher interest rates. Both lead to increased demand for a local currency. However, inflationary pressures put pressure on a currency regardless of growth. For example, if the UK reports that the consumer price index has risen more than the Bank of England's 2 percent inflation target, demand for sterling could decline. Similarly, when the Bank of England lowers interest rates, the pound sterling weakens. (Currency traders also watch the interest rate spread between countries.)