Britain’s economy unexpectedly shrank by 0.1% in October, marking a setback for Labour’s efforts to drive growth.
The Office for National Statistics (ONS) reported declines in construction and production as key contributors, while the services sector showed no growth.
This contraction surprised economists, who had anticipated a 0.1% expansion. It follows a 0.1% drop in September and meagre third-quarter growth of 0.1%.
Labour leader Keir Starmer has pledged to make the UK the fastest-growing G7 economy, promising higher real household incomes by 2029. However, business leaders have voiced concerns over October’s budget, which introduced £40bn in tax increases, citing its impact on spending and investment plans.
Economists warn that October’s contraction could signal further decline, with GDP shrinking in four of the five months leading up to October.
The Chancellor, Rachel Reeves, acknowledged the figures as “disappointing” but reaffirmed Labour’s commitment to long-term economic growth.
“While these figures are not what we hoped for, we are taking action to lay the foundations for sustainable economic growth, which will improve living standards nationwide,” Reeves said.
Business groups have criticised measures such as the increase in employer National Insurance contributions, citing rising costs and reduced incentives to invest.
In October, production output fell by 0.6%, led by declines in manufacturing, mining, and quarrying. Construction output also dropped by 0.4%.
ONS Director of Economic Statistics, Liz McKeown, highlighted weak performance in oil and gas extraction, hospitality, and retail. However, growth in telecoms, logistics, and legal services partially offset these declines.
Paul Dales, chief UK economist at Capital Economics, suggested the contraction might stem from businesses delaying activity ahead of the budget. He warned of a broader economic downturn, citing subdued PMI data and reduced business activity.
The UK’s dominant services sector grew at its slowest pace in over a year in November. The S&P Global UK Services PMI recorded a score of 50.8, down from 52.0 in October, as businesses adjusted to higher taxes.
The pound also felt the strain, falling 0.4% against the US dollar, reaching its lowest level in nearly two weeks. Analysts predict that the Bank of England may opt to cut interest rates when its Monetary Policy Committee meets later this month.
Consumer confidence remained subdued in December, according to GfK, with many Britons hesitant to make significant purchases. Business leaders like Anna Leach of the Institute of Directors noted that rising employment costs are forcing companies to revise their plans for 2024, adding pressure on growth prospects.
Trade figures showed a decline in imports and exports, with exports to the EU surpassing those to the rest of the world for the first time in nearly a year. Hailey Low of NIESR warned that a weakening export climate and rising global uncertainties could hinder sustained growth.
The Bank of England recently lowered its growth forecast for 2024 from 1.25% to 1%, while projecting a more robust recovery in 2025 at 1.5%, spurred by short-term fiscal stimulus.
The latest data underscores the challenges ahead for Labour as it seeks to fulfil its growth ambitions amidst economic uncertainty and rising costs.
