UK economy in October suffers first back-to-back declines since 2020

Britain’s economy shrank for a second month in October in the run-up to the new government’s first budget, the first back-to-back falls in output since the onset of the COVID-19 pandemic.

Gross domestic product shrank 0.1 per cent month-on-month in October, as it did in September, the Office for National Statistics said.

It was the first consecutive drop in monthly GDP - which is volatile and prone to revision - since March and April 2020, when Britain enforced its first coronavirus lockdown.

Economists polled by Reuters had forecast a monthly expansion of 0.1 per cent.

The services sector flatlined, while output in the manufacturing and construction industries declined in October.

Friday’s data adds to a run of worse-than-expected figures for Britain’s economy, with business surveys and retail sales readings also falling flat.

“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” finance minister Rachel Reeves said in a statement.

Her budget statement on Oct 30 imposed large tax rises on businesses, but raised investment and spending on public services. Its direct impact will be felt in GDP data from November onwards.

An ONS statistician said there was “mixed” anecdotal evidence for the budget impact, with some firms saying turnover had been affected by customers waiting for Reeves’ announcement. Others brought forward activity.

Sterling fell by around a quarter of a cent against the US dollar. Investors continued to price in around 3 quarter-point cuts in Bank of England interest rates by the end of next year.

Paul Dales, chief UK economist at consultancy Capital Economics, said the BoE was unlikely to cut interest rates at its meeting on Thursday.

“That said, we’re not as confident about that as we were before this data release,” he added.

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

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

Last month, the BoE trimmed its annual growth forecast for 2024 to 1 per cent from 1.25 per cent but predicted a stronger 2025 with 1.5 per cent growth, reflecting a short-term boost to the economy from Reeves’ big-spending budget plans.

Britain’s economic output has grown slowly since the pandemic. Only Germany, which was also hit hard by surging energy costs after Russia’s invasion of Ukraine, has done noticeably worse among the largest advanced economies.