A woman walks past a sale sign displayed in a store in London, Britain, Jan. 17, 2024. [Photo/Xinhua]

With two successive quarters of contraction, the British economy fell into a recession in the second half of 2023, data showed Thursday. It is expected to fare better this year despite pressure as borrowing costs remain high.

Britain's gross domestic product (GDP) fell by 0.3 percent in the fourth quarter (Q4) of 2023 after shrinking by 0.1 percent in Q3, according to an Office for National Statistics (ONS) report issued Thursday.

All three main sectors fell in October to December, the ONS said. Services fell by 0.2 percent. Production contracted by 1.0 percent and the construction sector decreased by 1.3 percent.

Manufacturing, construction and wholesale were the biggest drags on growth, partially offset by increases in hotels and rentals of vehicles and machinery, said ONS Director of Economic Statistics Liz McKeown.

Britain's GDP is estimated to expand by 0.1 percent in 2023, following a growth of 4.3 percent in 2022, which will be the weakest since the financial crisis in 2009, excluding the pandemic-hit 2020, the ONS added.

"Upward revisions are likely to come over time. But nevertheless, for now, the negative carryover effect from Q4-23 GDP will mechanically knock off something like 0.2 pp (percentage points) from 2024 GDP growth projections. This is material," said Sanjay Raja, Deutsche Bank's Chief UK Economist.

Britain has seen a stagnating economy and high inflation for about two years. Households have felt the squeeze amid a cost-of-living crisis. Widespread strikes broke out during the summer of 2022, and pay disputes were ongoing.

"High inflation is the single biggest barrier to growth which is why halving it has been our top priority," Chancellor of the Exchequer Jeremy Hunt said on Thursday.

"While interest rates are high -- so the Bank of England can bring inflation down -- low growth is not a surprise," Hunt added.

To combat consistently high inflation, the Bank of England held its benchmark interest rate at a nearly 16-year high of 5.25 percent. As borrowing costs have stayed high for a while, it was expected to have dented economic growth.

The central bank estimated in a February report that the economic growth is expected to pick up gradually, in large part reflecting a waning drag on the rate of growth from past rate increases. Inflation is projected to fall temporarily to the 2-percent target in the second quarter of 2024 before increasing again in the second half of this year.

Monetary policy will need to "remain restrictive for sufficiently long" to return inflation to the 2-percent target sustainably in the medium term in line with the central bank's remit, the central bank said in the report.

"The Bank of England might find it is faced with increased external pressure for rate cuts, on the back of the recession news," UK chief economist at Santander CIB Victoria Clarke said.

Elizabeth Martins, a senior economist at HSBC, said that as Britain ended 2023 in recession, this will garner some headlines and some political attention, with "growing the economy" being one of the government's targets.

Entering 2024, the British economy is expected to fare a little bit better. News from 2024 so far has been more positive, with rising real wages, falling offered mortgage rates, and recovering house prices, Purchasing Managers' Index and consumer confidence, Martins said.

"We are not forecasting a boom for 2024, but a better year than last year is surely not too much to hope for," Martins added.

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