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The UK financial system unexpectedly shrank 0.1 per cent in October, the second contraction in a row, in a blow to the Labour authorities’s financial agenda.
The month-to-month change in GDP revealed on Friday by the Workplace for Nationwide Statistics undershot the 0.1 per cent growth forecast by economists polled by Reuters. It adopted a 0.1 per cent contraction within the earlier month.
Sterling was down 0.3 per cent towards the greenback to $1.263. The yield on the two-year gilt, which strikes inversely to costs, fell 0.02 share factors to 4.26 per cent.
The figures underscore the financial problem for the brand new Labour authorities, which gained the UK basic election in July with a manifesto dedication to “secure the highest sustained growth in the G7”.
Labour has since sought to handle expectations, with chancellor Rachel Reeves warning of a grim inheritance within the public funds together with a £22bn fiscal “black hole” forward of her tax-raising October Funds.
“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” Reeves mentioned on Friday.
The Conservatives claimed the poor progress figures mirrored the affect on enterprise of Reeves’ gloomy post-election rhetoric on the financial system.
Mel Stride, shadow chancellor, mentioned on Friday: “It is no wonder businesses are sounding the alarm. This fall in growth shows the stark impact of the chancellor’s decisions and continually talking down the economy.”
Friday’s figures level to a weak begin to the fourth quarter after annual financial progress slowed to 0.1 per cent within the three months to September, down from 0.5 per cent within the earlier quarter.
Paul Dales, chief UK economist at Capital Economics, famous that the financial system had grown in simply one of many 5 months to October, and that progress was now 0.1 per cent decrease than earlier than Labour got here into energy.
“That suggests it’s not just the Budget that is holding the economy back,” he mentioned. “Instead, the drag from higher interest rates may be lasting longer than we thought.”
Final week the OECD reduce its 2024 progress forecast for the UK to 0.9 per cent from the 1.1 per cent that was anticipated in September as a result of weaker incoming knowledge.
Nevertheless, it expects progress to speed up to 1.7 per cent in 2025. That determine is weaker than the two.4 per cent growth forecast for the US however stronger than the 1.3 per cent for the Eurozone.
In keeping with Friday’s ONS figures, output within the dominant providers sector registered no progress in October, with manufacturing contracting 0.6 per cent and building registering a 0.4 per cent fall.
“The risk of a quarterly contraction [in the final three months of the year] is no longer negligible,” mentioned Sanjay Raja, economist at Deutsche Financial institution, noting {that a} doable commerce conflict when President-elect Donald Trump re-enters the White Home represented a big exterior headwind.
ONS director of financial statistics Liz McKeown mentioned: “Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics and legal firms.”
Separate knowledge revealed on Friday by analysis firm GfK confirmed shopper confidence remained low in November, edging up just one level to minus 17 in December.
The ONS reported combined feedback from companies regarding the Funds. These negatively affected mentioned turnover was hit as prospects waited for bulletins from the chancellor.
Nevertheless, others mentioned exercise had been introduced ahead in anticipation of varied Funds measures.
UK Prime Minister Sir Keir Starmer lately introduced he would goal family disposable revenue as a brand new “milestone” for score the success of his financial insurance policies.
Excessive borrowing prices are nonetheless limiting family spending and enterprise exercise, however they’ve come down from their peak after the Financial institution of England reduce rates of interest in August and November to the present 4.75 per cent.
Markets count on extra charge cuts subsequent yr as inflation eases from its multi-decade excessive reached in 2022.
James Smith, economist at ING, mentioned he believed the UK financial system was nonetheless “poised to outpace most of western Europe next year” since Labour elevated public spending by greater than 2 per cent of GDP in contrast with the Conservatives’ Funds plans.
Extra reporting by George Parker and Jim Pickard
