- Date
- 20 February 2024
Full Disclosure:
The UK's technical recession
By Jaysen Sutton |
Hi Reader 👋🏽,
The Story:
‘How is the economy doing?’ It’s a tough question to answer, especially given the news that the UK entered into a technical recession at the end of 2023. You might read this and think, ‘Oh no, a recession is bad!’, which is true, but it’s worth understanding what counts as a technical recession.
What you need to know for your interviews:
A recession is commonly defined as two consecutive quarters of negative GDP growth. A ‘quarter’ is simply a period of three months. So between July 2023 and September 2023 (the third quarter), and between October 2023 and December 2023 (the fourth quarter), the UK’s economy contracted.
What is GDP? That stands for Gross Domestic Product, and it’s a way of measuring the health and size of an economy, by calculating the value of the goods and services produced in an economy over a period of time. The US has the highest GDP, followed by China, and then Germany (it used to be Japan, but the economy has now been surpassed after the country slipped into a recession).
Despite all the sudden news stories about how the UK has entered into a recession, I think it’s really important to look beyond the headline here. Yes, this is a ‘technical recession’, and yes this is going to be politicised; Rishi Sunak is going to now have to defend his inability to meet his pledge for economic growth at the start of the year. More importantly, when we worry about a recession, we’re worried about a longer, sustained downturn - with job losses, wage freezes and a slowdown in spending. Given the economy contracted by just 0.1% in the third quarter of 2023, followed by 0.3% in the final quarter, it remains to be seen whether we will stay in a technical recession in the first quarter of January 2024, especially with a rosier interest rate picture.
What does this mean for law firms?
Law firms are facing their own increasing cost pressures, partly a result of rising staff costs, with newly qualified salaries increasing by 25 to 30% since 2020. This is eating away at profit margins; in its Companies House filing, Fieldfisher notes that its marginal profit increase was ‘due in part to the impact of high salary increases seen across the legal sector’. According to PWC’s annual law firm survey, the rise of staff costs have impacted profitability (44% of Top 100 firms reported falling profits), because they have risen higher than fee income.
Have any thoughts? I'd love to hear your perspective below!
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