The economy shrank by 0.1% in October and only grew by 0.1% between August and October, the latest UK GDP figures reveal. The news will create another headache for chancellor Rachel Reeves, who called the figures “disappointing”.
It is the second time in a row the economy has shrunk on a monthly basis, having also contracted by 0.1% in September.
Reeves is championing a pro-growth agenda, but several businesses have been vocal about the negative impact of the Autumn Budget – notably the decision to increase employer National Insurance.
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While the Budget wasn’t delivered until the end of October, some businesses told the Office for National Statistics (ONS) that their turnover was negatively affected over the course of the month as customers waited for the outcome of the fiscal statement.
The negative comments primarily came from manufacturers, wholesalers, retailers, computer programmers, professional services, and employment agencies, the Office for National Statistics (ONS) said.
Despite this, there were some positive comments from other industries who said the Budget brought forward activity in anticipation of the policy announcements. Such industries included real estate businesses, legal services and accountants.
The latest data continues a fairly measly run for the UK economy, which has seen a tale of two halves this year. Growth in the first two quarters of the year was stronger than many expected at 0.7% and 0.5% respectively, but third-quarter growth came in at a measly 0.1%.
“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” Reeves said.
What’s driving UK economic growth?
The services sector was the main contributor to growth in the three months to October, growing by 0.1%. The biggest contributors were professional, scientific and technical activities, followed by educational services.
The services sector is the largest segment of the UK economy, and accounts for around 80% of UK economic output.
The construction sector also grew by 0.4% over the same period. New work increased, but there was less demand for repair and maintenance work, particularly within private housing.
Growth in these two sectors was partially offset by a 0.3% fall in production output. A fall in mining and quarrying output was the main driver.
Outlook for the UK economy
Looking forward, Deutsche Bank’s chief UK economist Sanjay Raja said there is “probably more bad news on the horizon”.
He pointed to recent survey data which paints a “more pessimistic picture” for the final quarter than other growth models suggest, including those from the Bank of England and Office for Budget Responsibility (OBR).
Bad weather will also dampen the figures in the final quarter of the year, in his view. “Storm Bert and Storm Darragh will have likely disrupted output meaningfully in November and early December with both storms bringing strong winds, floods, snow, and precipitation that will hit activity,” Raja explained.
The picture could improve slightly over the longer term but, even then, UK growth isn’t expected to shoot the lights out.
In its latest economic and fiscal outlook, published alongside Reeves’s Budget in October, the OBR said: “Having stagnated last year, the economy is expected to grow by just over 1% this year, rising to 2% in 2025, before falling to around 1.5%.”
The OBR added that Budget policies should “temporarily boost output in the near term, but leave GDP largely unchanged in five years”.
Will weak growth prompt further interest rate cuts?
Despite weakness in the latest figures, the Bank of England is unlikely to cut interest rates at the final Monetary Policy Committee (MPC) meeting of the year.
The Bank has already cut rates twice since the summer, bringing the base rate to 4.75%, but has indicated it will tread a cautious path ahead.
Inflation picked up slightly in October rising from 1.7% to 2.3%, driven by higher energy prices. It is expected to rise again to around 2.6% when November’s figures are released next week.
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