Bank of England, City of London, London, England, November 6, 2024. The City of London is a city, county and local government area that includes London’s main central business district, the CBD. The City of London is popularly known simply as the City and colloquially known as the Square Mile. (Photo Credit: Mike Kemp/In Pictures via Getty Images)
Mike Kemp | In photos | getty images
The UK economy contracted unexpectedly in October due to uncertainty for businesses and consumers ahead of the newly elected government’s budget announcement.
The ONS said on Friday that gross domestic product (GDP) had fallen by about 0.1% on a monthly basis, a slump that officials said was due to lower production output. Economists polled by news agency Reuters had expected GDP to rise 0.1% in October.
This marked the second consecutive recession, following a 0.1% decline in GDP in September.
Real GDP is estimated to have grown by 0.1% in the three months to October compared with the previous three months ended in July, according to the ONS.
Sterling was trading 0.3% lower against the greenback at $1.2627 by 7:45 a.m. London time due to the disappointing print.
British Chancellor of the Exchequer Rachel Reeves acknowledged in a statement on Friday that October’s figures were “disappointing” but defended the government’s divisive economic strategy.
“We have put in place policies to deliver long-term economic growth,” she said, citing changes including a corporate tax cap and the launch of a 10-year infrastructure strategy.
In late October, Reeves unveiled the government’s first budget since replacing the longtime Conservative government in July.
The budget included plans by Prime Minister Keir Starmer’s government to raise taxes by 40 billion pounds ($50.5 billion). Reeves said at the time that this would be achieved through a range of new policies, including higher employer national insurance premiums (a tax on earnings), higher capital gains tax and the abolition of winter fuel payments for pensioners.
Some policies have received widespread criticism. For example, a rise in National Insurance payroll tax has prompted warnings that businesses will be less likely to hire new staff, and a report this week from recruitment site Indeed said the policy has already had an impact on job postings in the UK. do.
interest rate impact
October GDP figures dealt a fresh blow to the UK economy, which is still struggling to contain inflation, and new figures released on Friday also showed weak consumer confidence data.
But market watchers are not confident the latest data will change the Bank of England’s pledge to “gradually” lower interest rates.
The central bank cut interest rates by 25 basis points at its most recent meeting in November and is expected to keep rates steady at 4.75% at its meeting next week, according to overnight index swap data.
Thomas Pugh, UK economist at RSM, said the new data signaled the risk that the UK was “sliding back into stagflation territory” with inflation climbing back towards 3%.
“We still expect the economy to accelerate again through 2025, but forecasting quarterly growth of 0.3% in the fourth quarter now looks too ambitious,” he said.
“In any case, I doubt whether today’s data is bad enough to send the Bank of England into a surprise market surprise offering a rate cut as an early Christmas present at its meeting on December 19.”
Meanwhile, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said Christmas rate cuts were “questionable”.
“Despite these gloomy numbers, the likelihood of a rate cut this month remains low,” Thiru said in a note. “Some policymakers are likely to delay easing policy until February due to concerns about the recent rise in inflation.”
