Britain’s economy shrank unexpectedly in October as consumers held back on spending before Rachel Reeves’s budget, and car manufacturing struggled to recover from the cyber-attack on Jaguar Land Rover.
Figures from the Office for National Statistics (ONS) showed gross domestic product fell by 0.1%, after a 0.1% drop in output in September. City economists had predicted a 0.1% rise in October.
After a fourth consecutive month without growth, economists said the latest snapshot would probably cement a Bank of England interest rate cut next week amid fading inflationary pressures, fears over the sluggish outlook, and rising unemployment.
The Bank is widely expected to cut rates by a quarter of a percentage point to 3.75% when it announces its latest decision on 18 December.
“The UK economy has faltered more dramatically than we expected,” said Andrew Wishart, a senior UK economist at Berenberg. “This loss of momentum will bring inflation down more swiftly than we previously anticipated, allowing the BoE to act.”
Highlighting caution among businesses and households in the run-up to the chancellor’s tax-raising budget, the ONS said a sharp 0.3% decline in output in Britain’s dominant service sector contributed most to the fall.
Much of the decline was driven by a weakness in car sales and broader retail spending, alongside a slump in computer programming and consultancy activities. Construction output fell by 0.6%, while the production sector – which includes manufacturing – rose by 1.1% amid a recovery from the JLR attack that was weaker than hoped for.
GDP graphic
The ONS said businesses across all three main sectors of the economy – services, production and construction – reported that they, or their customers, were “waiting for the outcomes of the budget”. The biggest impact was felt by manufacturers, construction companies, wholesalers, computer programmers, real estate firms and employment agencies.
Scott Gardner, an investment strategist at JP Morgan Personal Investing, said the chancellor’s budget had a “numbing effect” on the economy. He said: “Budget speculation and uncertainty around potential tax changes dampened the mood among businesses and consumers, leading some to delay key decisions until the budget had been delivered.
“With growth now firmly in the slow lane, there is a clear feeling that the economy this year has taken two steps forward and one step back.”
Financial markets widely expect the Bank to cut interest rates for a sixth time since last summer at its next policy meeting on Thursday. Threadneedle Street has said Reeves’s policies – including relief on energy bills, prescription charges and fuel duty – could cut headline inflation by as much as half a percentage point next year.
Mel Stride, the shadow chancellor, said the government’s “economic mismanagement” had directly contributed to the weakness in economic growth.
A Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.”
Over the three months to the end of October, GDP also fell by 0.1%, below City estimates for zero growth over the period.
Economic output fell in September after hackers breaching JLR’s systems resulted in the country’s second-largest carmaker halting its UK production lines for several weeks.
In an incident estimated to have cost the economy at large up to £1.9bn, the halt crippled hundreds of smaller companies in the manufacturer’s supply chain, causing monthly output in the car industry to collapse by a third.
However, the ONS warned there had only been a “small recovery” in output in October as activity rebounded by 9.5%, leaving the industry still 21.8% below the levels seen in August. Overall manufacturing output rose by 0.5%, falling short of City estimates for a 1% recovery from the JLR attack.
Sanjay Raja, the chief UK economist at Deutsche Bank, said the latest monthly fall in overall GDP increased the chances of a drop in fourth-quarter output. “The road to the new year will be bumpy,” he said. “Budget uncertainty combined with weak hiring and rising unemployment fear will likely see spending and investment more subdued to end the year.”
