Bank of England in the City of London on 6th November 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government district that contains the primary central business district CBD of London. The City of London is widely referred to simply as the City is also colloquially known as the Square Mile. (photo by Mike Kemp/In Pictures via Getty Images)
Mike Kemp | In Pictures | Getty Images
The U.K. economy contracted unexpectedly in October amid uncertainty from businesses and consumers ahead of the newly elected government’s budget announcement.
Gross Domestic Product fell by an estimated 0.1% on a monthly basis, the ONS said Friday, with officials attributing the downturn to a decline in production output. Economists polled by news agency Reuters had projected a 0.1% rise in GDP in October.
It marked the country’s second consecutive economic downturn, following a 0.1% GDP decline in September.
Real GDP is estimated to have grown 0.1% in the three months to October, the ONS said, compared to the previous three months ending in July.
Sterling declined on the back of the disappointing print, trading 0.3% lower against the U.S. dollar at $1.2627 by 7:45 a.m. London time.
In a statement on Friday, U.K. Finance Minister Rachel Reeves conceded that the October figures were “disappointing,” but defended the government’s divisive economic strategies.
“We have put in place policies to deliver long term economic growth,” she said, citing changes such as a cap on corporation tax and the launch of a 10-year infrastructure strategy.
In late October, Reeves unveiled the government’s first budget since replacing the longstanding Conservative government in July.
The budget included plans from Prime Minister Keir Starmer’s government to raise taxes by £40 billion ($50.5 billion). Reeves said at the time that this would be achieved through a raft of new policies, including a hike in employer National Insurance payments — a tax on earnings — as well as a rise in capital gains tax and the scrapping of winter fuel payments to pensioners.
Some of the policies have been met with widespread criticism. The national insurance payroll tax hike, for example, has prompted warnings from businesses that they will be less likely to take on new workers, with a report from recruitment site Indeed this week suggesting the policy had already had an effect on British job openings.
Interest rate impact
The October GDP print marked a fresh blow to the U.K. economy, which is still struggling to keep inflation in check and also saw weak consumer confidence data in a new reading published Friday.
However, market watchers are not convinced the latest data will alter the Bank of England’s commitment to a “gradual” lowering of interest rates.
The central bank cut rates by 25 basis points at its most recent meeting in November, and is expected to hold rates steady at 4.75% at its subsequent meeting next week, according to overnight index swap data.
Thomas Pugh, U.K. economist at RSM, said the fresh round of data — coupled with inflation in Britain creeping back up toward 3% — indicated a risk that the U.K. was “slipping back into stagflation territory.”
“We still expect the economy to reaccelerate into 2025 — that said, 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 push the Bank of England into surprising markets with an early Christmas present of a rate cut at its meeting on Dec. 19th.”
Meanwhile, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, agreed a Christmas rate cut was “doubtful.”
“Despite these gloomy figures, the likelihood of a rate cut this month remains low with some policymakers likely to be concerned enough by the recent pick-up in inflation to defer relaxing policy again until February,” Thiru said in a note.
