The UK economy unexpectedly contracted in October, exacerbating fears of a prolonged economic slowdown as businesses and households grapple with uncertainty. According to the Office for National Statistics (ONS), gross domestic product (GDP) fell by 0.1% month-on-month, defying economists' expectations of a modest 0.1% increase. This contraction follows a similar 0.1% decline in September, marking the second consecutive month of negative growth and raising concerns about the country's economic trajectory.
The ONS attributed October's decline to reduced output across all key sectors. However, on a three-month rolling basis, GDP showed a slight increase of 0.1% for the period ending in October, compared to the previous three months. While this offers a glimmer of hope, the broader economic picture remains bleak.
The pound responded to the disappointing data by losing 0.3% against the US dollar, trading at $1.2627 at 7.45am London time.
The government defends the economic strategy despite criticism
British Finance Minister Rachel Reeves acknowledged that October's GDP data was disappointing, but defended the government's economic policies. She stressed that the administration, led by Prime Minister Keir Starmer, has implemented measures aimed at boosting long-term economic growth.
“We have put policies in place to ensure sustained growth,” Reeves said, referring to initiatives such as a cap on corporate taxes and the introduction of a 10-year infrastructure strategy.
The government's first budget, presented at the end of October, was at the center of the debate. Reeves has outlined plans to raise £40 billion ($50.5 billion) through tax rises, including higher employer National Insurance contributions, an increase in capital gains tax and the controversial scrapping of welfare payments. winter fuel for pensioners.
Although the government claims that these measures are necessary to stabilize the economy, they have attracted widespread criticism. Businesses, in particular, have expressed concern about the increase in social security, warning that the additional costs could discourage hiring. A report from jobs platform Indeed suggests that the policy is already negatively impacting job opportunities in the UK.
Inflation and interest rates complicate the outlook
October's GDP contraction comes amid ongoing struggles to control inflation. Recent data indicates that UK inflation is approaching 3%, while consumer confidence remains weak. These factors have further clouded the economic outlook, raising fears that the country could slide into stagflation, a worrying combination of stagnant growth and persistent inflation.
Despite the grim data, analysts believe the Bank of England is unlikely to deviate from its current monetary policy path. In November the central bank cut the key interest rate by 25 basis points to 4.75%. However, data on overnight index swaps suggests the Bank is likely to keep rates stable at its next meeting on December 19.
Thomas Pugh, UK economist at RSM, noted that the latest data points to growing risks to the economy. “The UK is moving ever closer to stagflation territory,” he said. “While we still expect an economic recovery in 2025, our previous forecast of 0.3% quarter-over-quarter growth in the fourth quarter now appears overly optimistic.”
Pugh also dismissed the possibility of a surprise rate cut by the Bank of England this month. “Today's data, while worrying, is unlikely to push the Bank to deliver an early Christmas present in the form of lower rates,” he added.
Suren Thiru, economic director at the Institute of Chartered Accountants in England and Wales, echoed this sentiment. “Despite these grim figures, it is doubtful that the Bank will cut rates in December,” Thiru said. “Some policymakers may still be wary of the recent rise in inflation and may postpone any accommodative measures until February.”
Economic challenges persist
The UK's economic challenges are compounded by a complex mix of national and global factors. Weak consumer spending, persistent geopolitical uncertainty and higher production costs for businesses continue to weigh on growth prospects. Meanwhile, the government's fiscal measures, while aimed at stabilizing public finances, risk further dampening demand in the short term.
As the country heads into the new year, politicians face a difficult balance. With businesses and households still under pressure, the government and the Bank of England will need to address these challenges carefully to avoid further economic deterioration.
For now, October's contraction serves as a stark reminder of the fragile state of the UK economy, highlighting the urgent need for policies that promote sustainable growth while tackling inflationary pressures. It remains to be seen whether the measures currently in force will be sufficient to reverse the downward trend.