The UK economy has contracted for the second consecutive month in October, marking the first back-to-back declines in output since the onset of the Covid-19 pandemic. The latest data from the Office for National Statistics (ONS) revealed that Gross Domestic Product (GDP) shrank by 0.1 per cent month-on-month in October, following the same decline in September. This marks the first time since March and April 2020, during the initial coronavirus lockdown, that the UK economy has experienced two consecutive monthly contractions.
Economists had forecast a modest recovery with a 0.1 per cent growth for October, but the economy has proven more fragile than expected. The disappointing figures come amid a broader trend of worse-than-anticipated economic performance, as business surveys and retail sales figures have also shown a decline.
The ONS reported that the services sector showed no growth in October, while both the manufacturing and construction industries suffered downturns. These sectors, which are key contributors to the economy, showed signs of stagnation, adding to concerns over the UK’s economic recovery in the wake of the pandemic.
Finance Minister Rachel Reeves responded to the data, acknowledging the disappointing figures but emphasising that the government had implemented policies aimed at fostering long-term economic growth. In her budget statement on October 30, Reeves introduced significant tax hikes for businesses, which are expected to have a direct impact on GDP figures starting from November onwards.
“There is no question that the figures this month are disappointing,” said Reeves. “However, we have put in place policies designed to deliver sustainable economic growth in the future.”
An ONS statistician noted that the anecdotal evidence surrounding the effects of the budget was “mixed”. Some businesses reported that their turnover had been affected as customers held off making purchases in anticipation of the tax increases, while others chose to bring forward their activities to avoid the forthcoming changes. This uneven response has yet to clearly reveal the full impact of the new fiscal policies.
In the foreign exchange markets, the pound fell by around a quarter of a cent against the US dollar following the release of the data. Investors have continued to factor in the likelihood of multiple interest rate cuts by the Bank of England over the next year, with expectations leaning towards three quarter-point reductions by the end of 2025.
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Despite the shrinking economy, analysts suggest that the outlook may not be as dire as the figures imply. “We don’t think the economy is weak enough to prompt the Bank of England to follow November’s rate cut with another one at next Thursday’s December meeting,” said Paul Dales, Chief UK Economist at Capital Economics. He noted that the current economic challenges were unlikely to push the Bank of England to take additional action in the immediate future.
While the economy’s performance in October raises concerns, it’s important to note that monthly GDP figures are subject to revision, and the full picture will become clearer in the coming months. The UK government’s policies, particularly the recent budget measures, may take time to filter through the economy, potentially influencing future growth patterns.
The economic slowdown in the UK comes at a crucial time as the country prepares for the first budget of the newly formed government. With fiscal policies set to take effect, much attention will now turn to how these changes will shape the economy in the months ahead. As businesses adjust to the new tax environment and consumers respond to the broader economic conditions, the coming months will be crucial in determining the trajectory of the UK’s economic recovery.
