UK economy shrinks for second month with little Christmas boost on the cards

The UK economy shrank 0.1 per cent in October, compounding signals that the slowdown may be more severe than previously thought. Chancellor Rachel Reeves described the surprise contraction as "disappointing" but added that the government has "put in place policies to deliver long-term economic growth".

The drop in GDP follows a 0.1 per cent fall in September and has prompted analysts at Capital Economics to note that there is now "every chance that the economy went backwards in Q4 as a whole." The Office for National Statistics said the October contraction was largely down to a decline in production output. The October figure was the first consecutive monthly fall in the GDP reading since March and April 2020. The ONS stressed that "early estimates of GDP are subject to revision".

Economists said it was difficult to assess how much of the decline was attributable to Ms Reeves's budget, which she presented at the end of October. The ONS said that some manufacturers, retailers and employment agencies had reported their turnovers had been “negatively affected” during the month. On the other hand, real estate brokers, lawyers and accountants saw an upswing in activity during October as clients made financial decisions ahead of the budget.

Consumer sentiment figures released on Friday also showed UK shoppers are unlikely to give the economy a festive boost, as they continue to rein in spending and avoid splashing out on big-ticket items in the run-up to Christmas. Research firm GfK’s sentiment indicator rose one point to minus 17, ending the year only slightly above the average reading. “In December, consumers adopted the holding pattern we’ve seen for much of 2024,” said Neil Bellamy, consumer insights director at GfK. “It’s the continuing uncharitable view on the UK’s general economic situation that’s suppressing consumer confidence.”

In November, the Bank of England trimmed its annual growth forecast for this year to 1 per cent, down from 1.25 per cent, but forecast a better 2025 with 1.5 per cent growth, as the UK economy gets a boost from the spending plans outlined in the budget. Nonetheless, business lobby groups said the increase in payroll taxes for employers in the budget would weigh on companies for some time, making growth a difficult goal.

“As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs," said Anna Leach, chief economist at the Institute of Directors (IoD). "Unfortunately, as business finances have been under pressure for a considerable period, and monetary policy remains restrictive, the conditions for investment are also unfavourable."

Interest rates

All eyes now turn to the Bank of England's interest rate setting meeting next week, where analysts still believe on balance that the Monetary Policy Committee will leave rates at 4.75 per cent. "We don't think the economy is weak enough to prompt the Bank to follow November's rate cut with another cut at next Thursday's December meeting," said Paul Dales, chief UK economist at Capital Economics. "That said, we're not as confident about that as we were before this data release."

Richard Hunter, head of markets at Interactive Investor, agreed that while the likelihood of a cut to rates by the Bank of England next week was remote, "the pressure is clearly mounting for some rather more aggressive action in the New Year in the face of what has been listless economic growth".