UK economy unexpectedly shrinks by 0.1% in October | Economic growth (GDP)

Britain’s economy shrank by 0.1% in October, underscoring the scale of Labour’s challenge to grow the economy.

Figures from the Office for National Statistics showed the unexpected drop in GDP was driven by falls in construction and manufacturing, while the dominant service sector stagnated.

Economists polled by Reuters had expected the economy to grow by 0.1 percent. That follows a 0.1% drop in September and sluggish growth of 0.1% in the third quarter of the year, according to figures last month.

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Keir Starmer said last week it was the government’s “goal” to make Britain the fastest-growing G7 economy, while pledging to deliver higher real household disposable incomes by 2029.

However, a number of companies have said they plan to curb spending and hiring after Labour’s October budget, which included a £40bn cut. pounds in tax increases.

Economists said the second consecutive monthly decline in GDP meant the economy had grown in only one of the five months to October and could mean the economy shrank for the fourth quarter as a whole.

The chancellor, Rachel Reeves, said the figures were “disappointing” but insisted Labor was getting the economy back on track for growth.

“While the numbers this month are disappointing, we have put policies in place to deliver long-term economic growth,” Reeves said. “We are determined to deliver economic growth, as higher growth means increased living standards for everyone, everywhere.”

Business groups have complained that measures announced in the Budget, including an increase in employers’ National Insurance contributions, are increasing their costs and discouraging investment.

Manufacturing output fell 0.6% in October due to declines in manufacturing, mining and quarrying, while construction fell 0.4%.

“The economy eased slightly in October, with services showing no growth overall and both manufacturing and construction falling,” said Liz McKeown, director of economic statistics at the ONS.

“Oil and gas extraction, pubs and restaurants and retail all had weak months, partly offset by growth in telecommunications, logistics and law firms.”

Paul Dales, the UK chief economist at Capital Economics, said it was “difficult to say how much of the fall is temporary as activity was put on hold ahead of the Budget”.

“The clear risk is that more activity was canceled or delayed after the budget,” he said, citing weak PMI data. “There is a good chance that the economy went back in the fourth quarter as a whole.”

Figures last week showed growth in Britain’s dominant services sector fell to the slowest in more than a year in November as businesses digested tax increases in the Budget.

The closely watched S&P Global UK Services PMI survey scored 50.8 in November, down from 52.0 in October.

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The pound fell to its lowest level against the US dollar in almost two weeks, falling as much as 0.4% in early trade.

Analysts said the contraction in the UK economy could make it more likely that the Bank of England’s monetary policy committee will vote to cut the base rate when they meet later this month.

“These latest figures will send a chill through the corridors of Westminster as the government’s growth agenda looks increasingly at risk,” said Isaac Stell, chief investment officer at the Wealth Club.

“With more and more companies saying they will cut hiring and investment to deal with rising costs related to the budget, the question will be where will the growth actually come from?”

The disappointing growth figures came as a survey by GfK found that consumer confidence remained depressed in December amid the “continued unfavorable view of the UK’s overall economic situation”.

The market research firm’s latest consumer confidence survey said consumers “don’t know where to go” and are still thinking twice about big-ticket purchases.

Anna Leach, Chief Economist at the Institute of Directors, said: “As we move further into the festive season and consumer confidence remains in a tailspin, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs.

“Recent blows to businesses have made the task of achieving stronger sustainable growth more difficult.”

Separate ONS trade data showed imports and exports of goods fell in October. Exports to the EU were higher than exports to the rest of the world for the first time in almost a year.

“A weakening export climate amid rising global political uncertainty and declining business confidence, exacerbated by the impact of recently announced budget measures, raises concerns about sustaining growth momentum,” said Hailey Low, associate economist at NIESR.

Last month, the bank trimmed its annual growth forecast for 2024 to 1% from 1.25%, but predicted a stronger 2025 with 1.5% growth, reflecting a short-term boost to the economy from the Budget.