The UK economy unexpectedly shrank in October, compounding fears of a prolonged economic slowdown as businesses and households grappled with uncertainty. According to the Office for National Statistics (ONS), gross domestic product (GDP) fell by 0.1% month-on-month, defying economists’ expectations of a modest 0.1% increase. This contraction follows a similar 0.1% decline in September, marking a second consecutive month of negative growth and raising concerns about the country’s economic trajectory.
The ONS attributed the October decline to reduced output across key sectors. However, on a three-month rolling basis, GDP showed a slight 0.1% increase for the period ending in October, compared with the preceding three months. While this offers a glimmer of hope, the broader economic picture remains bleak.
The pound responded to the disappointing data by slipping 0.3% against the US dollar, trading at $1.2627 as of 7:45 a.m. London time.
Government defends economic strategy amid criticism
British Finance Minister Rachel Reeves acknowledged that the October GDP figures were underwhelming but defended the government’s economic policies. She emphasized that the administration, led by Prime Minister Keir Starmer, has implemented measures aimed at fostering long-term economic growth.
“We have put policies in place to ensure sustained growth,” Reeves said, referencing initiatives such as a cap on corporate taxes and the introduction of a 10-year infrastructure strategy.
The government’s first budget, presented in late October, has been at the center of debate. Reeves outlined plans to raise £40 billion ($50.5 billion) through tax increases, including higher employer National Insurance contributions, an increase in capital gains tax, and the controversial elimination of winter fuel payments for pensioners.
While the government argues these measures are necessary to stabilize the economy, they have sparked widespread criticism. Businesses, in particular, have voiced concerns about the increase in National Insurance, warning that the added costs could deter hiring. A report from job platform Indeed suggested that the policy is already negatively impacting employment opportunities in the UK.
Inflation and interest rates complicate the outlook
The October GDP contraction comes amid ongoing struggles to control inflation. Recent data indicates that inflation in the UK is edging closer to 3%, while consumer confidence remains weak. These factors have further clouded the economic outlook, leading to fears that the country could slip into stagflation—a troubling combination of stagnant growth and persistent inflation.
Despite the grim data, analysts believe the Bank of England is unlikely to deviate from its current monetary policy path. The central bank cut its benchmark interest rate by 25 basis points in November, bringing it to 4.75%. However, overnight index swap data suggests that the Bank will likely keep rates steady at its upcoming meeting on December 19.
Thomas Pugh, UK economist at RSM, noted that the latest data points to growing risks for the economy. “The UK is inching closer to stagflation territory,” he said. “While we still anticipate an economic rebound in 2025, our earlier forecast of 0.3% quarter-on-quarter growth in Q4 now seems overly optimistic.”
Pugh also dismissed the possibility of a surprise rate cut by the Bank of England this month. “Today’s data, while concerning, is unlikely to prompt the Bank to deliver an early Christmas present in the form of lower rates,” he added.
Suren Thiru, economic director at the Institute of Chartered Accountants in England and Wales, echoed this sentiment. “Despite these bleak figures, it’s doubtful that the Bank will cut rates in December,” Thiru said. “Some policymakers may still be wary of the recent uptick in inflation and could defer any accommodative measures until February.”
Economic challenges persist
The UK’s economic challenges are compounded by a complex mix of domestic and global factors. Weak consumer spending, ongoing geopolitical uncertainty, and higher input costs for businesses continue to weigh on growth prospects. Meanwhile, the government’s fiscal measures, though aimed at stabilizing public finances, risk further dampening demand in the short term.
As the country heads into the new year, policymakers face a difficult balancing act. With businesses and households still under pressure, the government and the Bank of England will need to navigate these challenges carefully to avoid further economic deterioration.
For now, the October contraction serves as a stark reminder of the fragile state of the UK economy, highlighting the urgent need for policies that foster sustainable growth while addressing inflationary pressures. Whether the measures currently in place will be enough to reverse the downward trend remains to be seen.
