UK economy unexpectedly contracts 0.1% in October

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The UK economy unexpectedly contracted 0.1 per cent in October, driven by a fall in production, in a blow to the Labour government’s economic agenda.

The monthly change in GDP published on Friday by the Office for National Statistics was lower than the 0.1 per cent expansion forecast by economists polled by Reuters. It followed a 0.1 per cent contraction in the previous month.

Sterling fell 0.29 per cent against the dollar immediately following the data release.

The figures underscore the economic challenge for the new Labour government, which won the UK general election in July with a manifesto commitment to “secure the highest sustained growth in the G7”.

“We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere,” chancellor Rachel Reeves said on Friday.

“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” she added.

Last week, the OECD cut its 2024 growth forecast for the UK to 0.9 per cent from the 1.1 per cent that was expected in September due to weaker incoming data.

However, it expects growth to accelerate to 1.7 per cent in 2025. That figure is weaker than the 2.4 per cent expansion forecast for the US, but stronger than the 1.3 per cent for the Eurozone.

Friday’s figures point to a weak start to the fourth quarter after economic growth slowed to 0.1 per cent year on year in the three months to September, down from 0.5 per cent in the previous quarter.

Output in the dominant services sector registered no growth in October, with production contracting 0.6 per cent and construction registering a 0.4 fall.

ONS director of economic statistics Liz McKeown said: “Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics and legal firms.”

Separate data published on Friday by the research company GfK showed consumer confidence remained low in November, edging up only one point to minus-17 in December.

UK Prime Minister Sir Keir Starmer recently announced that he would target household disposable income as a new “milestone” for rating the success of his economic policies.

High borrowing costs are still limiting household spending and business activity, but they have come down from their peak after the Bank of England cut interest rates in August and November to the current 4.75 per cent.

Markets expect more rate cuts next year as inflation eases from its multi-decade high reached in 2022.

In the three months to September, GDP per person, a measure of living standards, was still 0.7 per cent below its level in the fourth quarter of 2019, before the pandemic, highlighting the hit to growth from Covid-19 and the cost of living crisis over the past five years.

Marion Amiot, a senior economist at S&P Global Ratings, said: “We expect disinflation and rate cuts will stimulate growth in the UK over the next 12 months as consumers reduce their savings and companies benefit from lower funding costs.”

This is a developing story