The Bank of England in the City of London on November 6, 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government area containing the main central business district of London. The City of London is widely referred to as 'The City' and also known colloquially as 'The Square Mile'. (Photo by Mike Kemp/Photo via Getty Images)
Mike Kemp | In pictures | Getty Images
The UK economy unexpectedly contracted in October amid uncertainty for businesses and consumers ahead of the newly elected government's budget announcement.
The Office for National Statistics said on Friday that gross domestic product fell by an estimated 0.1% on a monthly basis, with officials attributing the decline to lower production output. Economists polled by Reuters had expected GDP to rise by 0.1% in October.
This marks the country's second consecutive economic contraction, after the GDP fell by 0.1% in September.
The Office for National Statistics said real GDP was expected to grow by 0.1% in the three months to October, compared with the previous three months ending in July.
The British pound fell on the back of disappointing printing, trading 0.3% lower against the US dollar at $1.2627 by 7:45 AM London time.
In a statement issued on Friday, UK Finance Minister Rachel Reeves acknowledged that October's figures were “disappointing”, but defended the government's divisive economic strategies.
“We have put in place policies to achieve long-term economic growth,” she said, pointing to changes such as capping corporate tax and launching a 10-year infrastructure strategy.
In late October, Reeves unveiled the government's first budget since replacing the long-standing Conservative government in July.
The budget included plans from Prime Minister Keir Starmer's government to raise taxes by 40 billion pounds ($50.5 billion). Reeves said at the time that this would be achieved through a range of new policies, including increasing National Insurance payments to employers – a tax on profits – as well as increasing capital gains tax and scrapping winter fuel payments for pensioners.
Some policies have been widely criticized. For example, a rise in the National Insurance payroll tax has sparked warnings from businesses that they will be less likely to hire new workers, with a report from employment website Indeed this week suggesting the policy has already had an impact on British job opportunities.
Interest rate effect
The October GDP reading represents a new blow to the UK economy, which is still struggling to keep inflation under control and also saw weak consumer confidence data in a new reading published on Friday.
However, market watchers are not convinced that the latest data will change the Bank of England's commitment to a “gradual” cut in interest rates.
The central bank cut interest rates by 25 basis points at its last meeting in November, and is expected to keep interest rates steady at 4.75% at its subsequent meeting next week, according to overnight index swap data.
Thomas Pugh, a British economist at RSM, said the new round of data – coupled with Britain's inflation rate rising towards 3% – points to the risk of the UK slipping back into stagflation territory.
“We still expect the economy to accelerate again into 2025 – however, our forecast of 0.3% quarter-on-quarter growth in the fourth quarter now looks too ambitious,” he said.
“In any case, we doubt that today's data is bad enough to prompt the Bank of England to surprise markets with an early Christmas gift of a rate cut at its meeting on 19 December.”
Meanwhile, Suren Thero, director of economics at the Institute of Chartered Accountants in England and Wales, agreed that a Christmas interest rate cut was “doubtful”.
“Despite these bleak numbers, the likelihood of a rate cut this month remains low, and some policymakers will likely be concerned enough by the recent rise in inflation to postpone further easing policy until February,” Theroux said in a note.
