The UK economy shrank for a second consecutive month in October, marking the first back-to-back declines in gross domestic product (GDP) since the COVID-19 pandemic.
This poses a significant challenge for newly appointed Treasury chief Rachel Reeves ahead of her inaugural budget.
According to the Office for National Statistics (ONS), GDP contracted by 0.1% in October, mirroring the decline in September. This marks the first consecutive monthly GDP decline since March and April 2020, during the country’s initial coronavirus lockdown. Economists surveyed by Reuters had anticipated modest growth of 0.1% for October.
The ONS attributed the contraction to mixed business activity, with some companies reporting reduced turnover due to uncertainty surrounding the upcoming budget, which included significant tax increases on businesses. In contrast, others brought forward their activities ahead of the changes.
In October, the services sector showed no growth, while both the manufacturing and construction sectors experienced declines. This data reflects the state of the economy in the weeks leading up to Reeves’ budget announcement on October 30.
Reeves and Prime Minister Keir Starmer, who have centered Labour’s economic policy on boosting growth, had previously warned that the budget would necessitate tough tax hikes.
The latest GDP figures add to a series of disappointing economic indicators for the UK. Business surveys and retail sales have also shown weak performance in recent months.
"While this month's figures are disappointing, we have introduced policies designed to promote long-term economic growth," Reeves said in a statement.
Despite these assurances, many analysts expect businesses to face challenges due to higher social security contributions, although the budget’s public investment measures are anticipated to accelerate growth in 2025.
Consumer confidence showed a slight improvement in December, according to a new survey, offering Reeves a glimmer of hope amid largely pessimistic business data. However, the S&P Global Purchasing Managers’ Index (PMI) report revealed that private sector activity in November contracted for the first time in over a year.
Following the GDP report, the British pound initially fell against the US dollar before partially recovering. Financial markets are currently pricing in around three quarter-point interest rate cuts from the Bank of England (BoE) by the end of 2024.
Paul Dales, Chief UK Economist at Capital Economics, said the GDP data is unlikely to prompt immediate rate cuts from the BoE during its upcoming meeting, though he acknowledged the data adds uncertainty to future decisions.
Last month, the BoE downgraded its 2024 growth forecast from 1.25% to 1%, while projecting stronger growth of 1.5% in 2025, partly due to Reeves’ budget initiatives.
The UK’s economic recovery since the pandemic has been sluggish. Among major advanced economies, only Germany has fared worse, largely due to its exposure to surging energy costs following Russia’s invasion of Ukraine.
In a related development, separate ONS trade data revealed a decline in imports and exports of goods in October. Notably, exports to the European Union outpaced those to the rest of the world for the first time in nearly a year.