UK Economy Shrinks 0.1% in October Surprising Analysts

Britain’s economy contracted for the second consecutive month in October, marking the first back-to-back decline in output since the early days of the Covid-19 pandemic. According to the Office for National Statistics (ONS), Gross Domestic Product (GDP) fell by 0.1% month-on-month, the same decline as in September. This marks the first time since March and April 2020 that Britain has experienced two consecutive months of negative GDP growth.

Economists had anticipated a slight 0.1% increase in monthly GDP. The services sector showed no growth, while the manufacturing and construction sectors also saw a drop in output. This recent data adds to a string of disappointing economic figures, including weak business surveys and retail sales.

Despite these setbacks, Finance Minister Rachel Reeves remained optimistic, stating that the government had implemented policies aimed at fostering long-term economic growth. Reeves’ budget statement on October 30, which included significant tax increases on businesses, is expected to have a direct impact on GDP from November onward. However, anecdotal evidence regarding the budget’s immediate effects has been mixed, with some businesses reporting delays in customer activity due to the budget announcement, while others had accelerated their operations.

The pound weakened slightly against the US dollar, and investors continued to anticipate multiple interest rate cuts by the Bank of England by the end of next year. However, some analysts, including Paul Dales from Capital Economics, expressed uncertainty about the Bank’s next steps, particularly regarding the December meeting.

Earlier forecasts from the Bank of England had predicted a modest 1% growth for 2024, down from the previous estimate of 1.25%, with stronger growth expected in 2025. Britain’s economic recovery has been slow post-pandemic, and it has faced challenges, including the impact of rising energy costs following Russia’s invasion of Ukraine. Among the largest advanced economies, only Germany has performed worse.

Prime Minister Keir Starmer has reiterated his goal for Britain to achieve the fastest per capita GDP growth within the Group of Seven (G7) advanced economies.