Bank of England in the City of London on November 6, 2024 in London, United Kingdom. The City of London is a city, formal county and local government district containing the main central business district (CBD) of London. The City of London is commonly referred to simply as the “City” and is also colloquially referred to as the “Square Mile”. (Photo by Mike Kemp/In Pictures via Getty Images)
Mike Kemp | In pictures | Getty Images
The UK economy contracted unexpectedly in October due to uncertainty among businesses and consumers ahead of the newly elected government's budget announcement.
Gross domestic product fell an estimated 0.1% monthly, the ONS said on Friday, with officials attributing the fall to a decline in manufacturing output. Economists polled by the Reuters news agency had forecast a 0.1% increase in GDP for October.
It marked the country's second consecutive economic downturn, following a 0.1% drop in GDP in September.
ONS estimates that real GDP grew by 0.1% in the three months to October compared to the previous three months ending in July.
Sterling fell on the disappointing data, trading 0.3% lower against the U.S. dollar at $1.2627 at 7:45 a.m. London time.
In a statement on Friday, British Finance Minister Rachel Reeves acknowledged October's figures were “disappointing” but defended the government's controversial economic policies.
“We have introduced policies to achieve long-term economic growth,” she said, pointing to changes such as a corporate tax cap and the introduction of a 10-year infrastructure strategy.
At the end of October, Reeves presented the government's first budget plan since replacing the long-standing Conservative government in July.
The budget included plans by Prime Minister Keir Starmer's government to increase taxes by 40 billion pounds ($50.5 billion). Reeves said at the time that this would be achieved through a series of new measures, including an increase in employer national insurance contributions – an income tax – as well as an increase in capital gains tax and the scrapping of winter fuel payments to pensioners.
Some of the guidelines drew widespread criticism. The rise in National Insurance payroll tax, for example, has led to warnings from companies that they will be less likely to hire new workers, with a report from recruitment site Indeed this week suggesting the policy has already had an impact on job vacancies in the UK.
Effects on the interest rate
October's GDP figures marked a new blow to the British economy, which is still struggling to keep inflation under control and also posted weak consumer confidence data in a new reading released on Friday.
But market watchers are not convinced the latest data will change the Bank of England's commitment to a “gradual” cut in interest rates.
The central bank cut rates by 25 basis points at its last meeting in November and is expected to keep rates steady at 4.75% at its next meeting next week, overnight index swap data showed.
Thomas Pugh, UK economist at RSM, said the new round of data – coupled with a renewed rise in UK inflation towards 3% – pointed to a risk of the UK “sliding back into stagflation territory”.
“We still expect the economy to regain momentum by 2025 – however our forecast of 0.3% quarter-on-quarter growth in the fourth quarter now appears overly ambitious,” he said.
“In any case, we doubt today’s data is bad enough to send the Bank of England into surprise markets with a rate cut at its meeting on December 19.”
Meanwhile, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, agreed that a Christmas rate cut was “doubtful”.
“Despite these grim numbers, the likelihood of a rate cut this month remains low as some policymakers are likely so concerned about the recent rise in inflation that they are again delaying policy easing until February,” Thiru said in a note.
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