UK economy shrinks for second month in a row
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The UK economy shrank by 0.1% in October, continuing a weak trend as uncertainty around the Budget and high inflation dampened consumer and business confidence. [Getty Images]
The UK economy contracted for the second consecutive month in October, with official figures revealing a 0.1% drop in output. This came despite expectations that the economy would bounce back after a dip in September. According to the Office for National Statistics (ONS), many sectors, including pubs, restaurants, and retail, experienced weak performance, contributing to the overall economic decline. This downturn raised concerns about the broader economic outlook, particularly as the government’s Budget was announced at the end of October, a period of heightened uncertainty that had been affecting consumer and business confidence.
Chancellor Rachel Reeves expressed disappointment over the figures but assured the public that policies were in place to stimulate long-term economic growth. However, her remarks were met with criticism from Shadow Chancellor Mel Stride, who argued that the fall in growth highlighted the negative impact of the government’s economic decisions, especially its persistent pessimism about the economy.
The sluggish performance of the economy was attributed to uncertainty surrounding the Budget. KPMG’s chief economist, Yael Selfin, noted that many businesses and consumers were holding back on spending in the lead-up to the Budget. Some industries, including real estate, law firms, and accountancy firms, did try to accelerate work before the Budget announcement, which helped partially offset some of the broader economic weakness. Despite these efforts, overall economic activity remained subdued.
Capital Economics highlighted that the UK economy had only grown once in the past five months, with a 0.1% decrease from the time of Labour’s election victory in July. According to Capital’s chief UK economist, Paul Dales, the current slowdown was not solely due to the uncertainty surrounding the Budget, suggesting that the impact of higher interest rates on the economy might be more prolonged than initially expected. The Bank of England, which had reduced interest rates twice this year, still maintains a relatively high rate of 4.75%, and it is not anticipated that borrowing costs will be lowered further until 2025.
Simon Wells, chief European economist at HSBC, cautioned against placing too much weight on the October figures, noting that they were an initial estimate and could be subject to significant revision. While the figure for October was a modest contraction of 0.1%, Wells pointed out that more accurate data in the coming months could offer a clearer picture of the economy’s performance.
Looking at the broader trend, over the three months leading up to October, the economy showed a slight expansion of 0.1%. However, several sectors continued to face challenges. Manufacturing recorded the sharpest decline in activity, falling by 0.6%, while construction also shrank by 0.4%. The services sector, which accounts for the majority of the UK’s economic output, experienced no growth, stalling at zero growth for the month. This stall in the services sector, which includes crucial industries such as retail and hospitality, reflects ongoing concerns about consumer spending and overall business confidence.
Small businesses, in particular, have felt the strain of the economic slowdown. Rick Gaglio, owner of Twisted Fabric, a menswear shop in Hertfordshire, emphasized that people were still being cautious due to high prices, which he attributed to ongoing inflation. He noted that retail sales were especially slow during the summer months due to wet weather, which dampened consumer spending. For small businesses like his, 2024 has been a particularly tough year, with Gaglio expressing a desire for more positive economic news.
In the face of these economic challenges, the UK’s recovery path remains uncertain. Despite the slow growth and contraction in certain sectors, government officials, business leaders, and economists alike are hoping that forthcoming measures, such as further adjustments to interest rates or targeted support for struggling industries, will help reverse the trend. The current economic landscape suggests that growth may continue to be uneven in the near future, with certain sectors recovering faster than others.
As the government continues to implement its policies aimed at boosting long-term growth, the impact of these measures may take time to become evident in the broader economy. While some indicators of economic strength remain, such as low unemployment and modest growth in certain sectors, the overall outlook remains clouded by inflationary pressures and global economic uncertainty. How the UK economy fares in the coming months will depend largely on the effectiveness of these policies and the ability of businesses and consumers to adapt to a changing economic environment.
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